Question

Pronghorn Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,978,200 on January 1, 2017. Pronghorn expected to complete the building by December 31, 2017. Pronghorn has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2016 $2,012,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,615,200 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,001,500 (a) Assume that Pronghorn completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,207,200, and the weighted-average amount of accumulated expenditures was $3,811,300. 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.) (b) Compute the depreciation expense for the year ended December 31, 2018. Crane 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 $297,000. (Round answer to 0 decimal places, e.g. 5,275.)

Answer 1

1	The avoidable interest on this project
Step 1	Weighted average accumulated expenditure	$3,811,300
Step 2	Applicable interest rate
	Construction loan	$2,012,000
	Applicable interest rate	12%
	Excess of Weighted average accumulated expenditure
	over contruction loan -	$1,799,300
	Applicable interest rate - weighted average interest rate	10.38%
	Short term loan	$1,615,200	10%	$161,520
	Long term loan	$1,001,500	11%	$110,165
		$2,616,700		$271,685
	Weighted average interest rate	10.38%
Step 3	Avoidable interest on this project
	Interest on first $2012000 @ 12%	$241,440
	Interest on remaining $1799300 @10.38%	$186,767
	Avoidable interest on this project	$428,207
Step 4	Actual interest expense
	Construction loan	$2,012,000	12%	$241,440
	Short term loan	$1,615,200	10%	$161,520
	Long term loan	$1,001,500	11%	$110,165
				$513,125
	As the interest related to the project is less than the actual expense all the interest of $428,207 will
	be capitalized.
2	Depreciation expense for the year ended December 31, 2018
	Cost of office and warehouse	$5,207,200
	Add: Interest to be capitalized	$428,207
	Total cost	$5,635,407
	Less: Salvage value	$297,000
	Cost of office and warehouse building to be depreciated	$5,338,407
	Estimated life	30 years
	Depreciation expense for each year	$177,947