Question

Riverbed 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. Riverbed expected to complete the building by December 31, 2020. Riverbed 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

1. Assume that Riverbed 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 $

2. Compute the depreciation expense for the year ended December 31, 2021. Riverbed 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

	a)
	calculation of weighted average interest rate :
	short term loan = $840000 * 10% = $84000
	Long term loan = $600000 * 11% = $66000
	weighted average interest rate = ($84000 + $66000) / ($840000 + $600000)
	= $150000 / $1440000
	= 10.42%.
	Avoidable interest = [$1200000 * 10%] + [(2160000-1200000)*10.42%]
	= $120000 + 100032
	= $220032
	b)
	calculation of depreciation expense for dec 2021
	cost of building = $3120000 + $220032
	= $3340032
	depreciation expense = (cost - salvage value) / useful life
	= ($3340032 - $180000) / 30 years
	= $105334