Question

Cheyenne Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,971,900 on January 1, 2017. Cheyenne expected to complete the building by December 31, 2017. Cheyenne has the following debt obligations outstanding during the construction period.

Construction loan-10% interest, payable semiannually, issued December 31, 2016		$1,999,900
Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2018		1,611,800
Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2021		1,006,500

Assume that Cheyenne completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,212,300, and the weighted-average amount of accumulated expenditures was $3,779,200. 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. Cheyenne 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 $302,700. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

Part 1

Answer 1

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Part a
(a)	Avoidable Interest
Weighted-Average
Accumulated Expenditures	Interest Rate	Avoidable Interest
$                                                                                     1,999,900	10.00%	$                                199,990
$                                                                                     1,600,000	8.38%	$                                134,151
$                                                                                     3,599,900		$                                334,141
Weighted-average interest rate computation	Principal	Interest
8% short-term loan	$                      1,611,800	$                                128,944
9% long-term loan	$                      1,006,500	$                                  90,585
	$                      2,618,300	$                                219,529
Total Interest	$                         219,529	8.38%
Total Principal	$                      2,618,300
Actual Interest
Construction loan	$1,999,900 X 10% =	$                                199,990
Short-term loan	$1,611,800 X 8% =	$                                128,944
Long-term loan	$1,006,500 X 9% =	$                                  90,585
	Total	$                                419,519
Because avoidable interest is lower than actual interest, use avoidable interest.
Cost	$                      5,212,300
Interest capitalized	$                         334,141
Total cost	$                      5,546,441
(b)
Depreciation Expense	$                         174,791
($5,546,441-$302,700)/30 Years