Question

Flounder Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $3,000,000 on January 1, 2020. Flounder expected to complete the building by December 31, 2020. Flounder has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued December 31, 2019		$1,200,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021		840,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024		600,000

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Assume that Flounder completed the office and warehouse building on December 31, 2020, as planned at a total cost of $3,120,000, and the weighted-average amount of accumulated expenditures was $2,160,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2 decimal places, e.g. 7.58% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.)

Avoidable Interest

Compute the depreciation expense for the year ended December 31, 2021. Flounder elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $180,000. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

Answer 1

Answer a.

Avoidable interest

$244,032

Explanation:

Weighted Average Rate for non-specific loans

Type	Amount	Rate	Interest
Short-term loan	$840,000	10%	$84,000
Long-term loan	$600,000	11%	$66,000
Total	$1,440,000		$150,000

Weighted Average Rate = $150,000 / $1,440,000 = 10.42 %

Calculation of avoidable interest

	Amount	Rate	Avoidable interest
Construction loan	$1,200,000	12%	$144,000
Balance loan using Weighted Average Rate	$960,000	10.42 %	$100,032
Weighted-average amount of accumulated expenditures (given)	$2,160,000		$244,032

Answer b.

Depreciation Expense

$106,134

Explanation:

Type	Actual Interest amount
Construction loan ($1,200,000 * 12%)	$144,000
Short-term loan ($840,000 * 10%)	$84,000
Long-term loan ($600,000 * 11%)	$66,000
Total actual interest	$294,000

Since total actual interest incurred is more than the avoidable interest, interest amount to be capitalize = Avoidable interest = $244,032

Total building cost = Cost + Avoidable interest = $3,120,000 + $244,032 = $3,364,032

Depreciation Expense = (Total building cost - Salvage value) / Useful life

= ($3,364,032 - $180,000) / 30 years = $106,134