Question

Skysong Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,981,900 on January 1, 2017. Skysong expected to complete the building by December 31, 2017. Skysong has the following debt obligations outstanding during the construction period. Construction loan-10% interest, payable semiannually, issued December 31, 2016 $2,000,100 Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,595,800 Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,002,900

Assume that Skysong completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,251,100, and the weighted-average amount of accumulated expenditures was $3,799,100. 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, 2018. Skysong 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 $297,300. (Round answer to 0 decimal places, e.g. 5,275.) Depreciation Expense $

Answer 1

Avoidable interest

$350,946

Explanation:-

Weighted-average rate of interest
	Loan amount (a)	rate (b)	Interest (a) × (b)
8% short term loan	$1,595,800	8%	$127,664 ($1,595,800 ×8%)
9% long term loan	$1,002,900	9%	$90,261 ($1,002,900 ×9%)
Total	$2,598,700		$217,925

Weighted-average interest rate = interest/ loan amount

Weighted-average interest rate = $217,925/$2,598,700 = 0.0839; 0.0839 × 100 =8.39%

	Weighted-average Accumulated expenditures (a)	rate (b)	Avoidable interest (a) × (b)
Interest on construction loan	$2,000,100	10%	$200,010
Interest on remaining loan ($3,799,100 - $2,000,100)	$1,799,000	8.39%	$150,936.1
Total avoidable interest			$350,946.1 or $350,946 (round off)

Depreciation expense

$176,825

Explanation:-

Calculation of actual interest
Construction loan	$2,000,100 ×10% =	$200,010
Short term loan	$1,595,800 ×8% =	$127,664
Long term loan	$1,002,900 ×9% =	$90,261
Total		$417,935

Cost of asset= cost + interest capitalized (use avoidable interest- because it is lower than actual interest)

Cost of asset = $5,251,100 + $350,946 = $5,602,046

Depreciation expense = cost of asset- salvage value/ useful life of asset

Depreciation expense = $5,602,046 - $297,300 /30 years

Depreciation expense = $5,304,746/30 years

Depreciation expense = $176,825 (round off)