Question

Bramble Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $7,500,000 on January 1, 2020. Bramble expected to complete the building by December 31, 2020. Bramble has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 $3,000,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 2,100,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 1,500,000

Assume that Bramble completed the office and warehouse building on December 31, 2020, as planned at a total cost of $7,800,000, and the weighted-average amount of accumulated expenditures was $5,400,000. 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

$

Compute the depreciation expense for the year ended December 31, 2021. Bramble 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 $450,000. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

Answer 1

Avoidable interest on this project

Particular	Weighted-average accumulated expenditures (a)	Interest rate (b)	Avoidable Interest (a × b )
Interest on loan for Construction	$30,00,000	12%	$360000
Interest on remaining loan calculated on weighted-average rate( $54,00,000 -$30,00,000 )	$2400000	10.42% (Note - 1)	$250080
Total	$5400000		$610080

Note - Calculation of weighted-average rate

Loan type	Loan Amount	Interest rate	Interest (Loan Amount × Interest rate)
Short-term Loan	$21,00,000	10%	$210000
Long -term loan	$15,00,000	11%	$165000
Total	$3600000		$375000

Weighted-average rate = Total Interest / Total Loan Amount

Weighted-average rate = $375000/ $3600000

Weighted-average rate = 10.42%

Computation of the depreciation expense for the year ended December 31, 2021 -

Bramble furniture company select straight line method for Depreciation

First we calculated Actual Interest Debt obligation outstanding during the construction period.

Loan type	Loan Amount	Interest rate	Interest (Loan Amount × Interest rate)
Construction loan	$30,00,000	12%	$360000
Short-term Loan	$21,00,000	10%	$210000
Long -term loan	$15,00,000	11%	$165000
Total			$735000

Since Avoidable Interest is lower than Actual Interest so we take Avoidable Interest to calculate the total cost of building.

Total cost of Building = Total cost + Avoidable Interest

Total cost = $7800000 + $610080

Total cost of building = $84,100,80

Useful life of Building = 30 years

salvage value = $4,50,000

Deprecation expense = (Total cost of building - Salvage value) / Useful life of Building

Deprecation expense = ($8410080 - $450000 ) / 30

Deprecation expense = $265336