Harrisburg Furniture Company started construction of a combination office and wa

Question

Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,018,400 on January 1, 2014. Harrisburg expected to complete the building by December 31, 2014. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan—12% interest, payable semiannually, issued December 31, 2013 $2,011,200
Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2015 1,614,400
Long-term loan—11% interest, payable on January 1 of each year; principal payable on January 1, 2018 1,024,300

Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as planned at a total cost of $5,217,000, and the weighted average amount of accumulated expenditures was $3,811,700. 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, 2015. Harrisburg 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 $308,200. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense
$

Explanation / Answer

Loan Details Amt   Interest% Interest Specific Constricuion loan           2,011,200 12%        241,344 General Loans ST Loan             1,614,400 10%        161,440 LT Loan           1,024,300 11%        112,673 Total General Loan           2,638,700        274,113 Average Interest on Gen Loan=179018/2638700= 10.39% Total Actual Interest        515,457 Total Accumulated Expenditure =           3,811,700 Avoidable Interest Costs Accumulated Expenditure Interest Rate Avoidable Interest                                                               2,011,200 12%         241,344                                                               1,800,500 10.39%         187,039 Avoidable Interest Costs $ 428,383.2 So Avoidable interest cost = $       428,383.2 As Avoidable interest cost is lower than actual interest cost,   $ 428383 will be used in Capitalization. Capitalized Cost of Building Details Amt $ Building Cost           5,217,000 Interest Capitalized               428,383 Total Amount Capitalized=           5,645,383 Less salvage                 308,200 Depreciable value           5,337,183 Useful life in years                         30 SL depreciation per year=               177,906 So Depreciation expense for 2015= $    177,906.11

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