Question

Culver Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $6,000,000 on January 1, 2020. Culver expected to complete the building by December 31, 2020. Culver has the following debt obligations outstanding during the construction period.

Construction loan-14% interest, payable semiannually, issued December 31, 2019		$2,400,000
Short-term loan-12% interest, payable monthly, and principal payable at maturity on May 30, 2021		1,680,000
Long-term loan-13% interest, payable on January 1 of each year. Principal payable on January 1, 2024		1,200,000

1. Assume that Culver completed the office and warehouse building on December 31, 2020, as planned at a total cost of $6,240,000, and the weighted-average amount of accumulated expenditures was $4,320,000. Compute the avoidable interest on this project.

2. Compute the depreciation expense for the year ended December 31, 2021. Culver 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 $360,000.

Answer 1

1)

a)

Interest payable in 2020 on short – term loan = $ 1,680,000*12% = $201,600

Interest payable in 2020 on long – term loan = $1,200,000*13% = $ 156,000

Weighted average interest rate = $201,600 +$156,000/$1,680,000+$1,200,000 *100

                                                         =12.42%

b) Avoidable interest = ($2,400,000*14%) +(($4,320,000 - $2,400,000 )*12.42%)

                                        =$574,464

2)

a)

Cost to complete the construction = $6,240,000

Avoidable interest = $574,464

Total capitalized cost = $6,240,000 +$574,464 =$6,814,464

b)

Total capitalized cost =$6,814,464

Salvage value = $360,000

Estimated life of the asset = 30 years

Depreciation = ($6,814,464 - $360,000)/30

                         = 215,149

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