Question

Grouper Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,024,000 on January 1, 2017. Grouper expected to complete the building by December 31, 2017. Grouper has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2016 $1,990,600 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,603,500 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 990,300 Compute the depreciation expense for the year ended December 31, 2018. Grouper 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 $302,800. (Round answer to 0 decimal places, e.g. 5,275.)

Answer 1

Estimated cost as on January 1, 2017 = $5,024,000

As the building would be completed by December 31, 2017, all the interest expenses till December 31,2017 would be capitalised.

• Interest on 12% construction loan taken on december 31,2016 to december 31, 2017 would be capitalised :-

Semiannual interest as on june 30, 2017 = 1,990,600 * 12% * 6/12

= $119,436

Similarly, semiannual interest as on december 30, 2017 = $119,436

Total interest on 12% loan = 119436+119436 = 238,872

• Interest on 10% short term loan :-   

Monthly interest = 1603500 * 10% * 1/12

=13,362.5

Therefore, the interest for 1 year (from december 31,2016 to december 31, 2017) is -

= 13362.5 * 12 =160,350

• Interest on 11% long term loan from december 31,2016 to december 31, 2017:-

= 990,300 * 11% = 108,933

Total interest to be capitalised( incurred from december 31,2016 to december 31, 2017)

=238,872 + 160,350 + 108,933

=508,155

Useful life of the asset = 30 years

Salvage value = 302,800

Total cost of asset required to be depreciated over 30 years = 5,024,000 +508,155

=5,532,155

• Depreciation would start from January 1, 2018 (because building is ready for use from this date)

  Depreciation expense for the year ended December 31, 2018 on straight line basis :-

Total depreciable cost of asset less salvage value/ Useful life in years

= (5,532,155-302,800)/30

=$174,312(rounded off)