Exercise 10-7 Harrisburg Furniture Company started construction of a combination
ID: 2482318 • Letter: E
Question
Exercise 10-7 Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,015,700 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 1,623,500 Long-term loan—11% interest, payable on January 1 of each year; principal payable on January 1, 2018 1,011,400 Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as planned at a total cost of $5,218,000, and the weighted average amount of accumulated expenditures was $3,810,700. 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 $ 10 LINK TO TEXT 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 $308,800. (Round answer to 0 decimal places, e.g. 5,275.) Depreciation Expense $
Explanation / Answer
Avoidable interest is calculated as
It specifies amount of interest on construction that could have been avoided
Specific Borrowing Rate Amount interest per year construction loan 12% 2011200 241344 General borrowing Rate Amount interest per year short term interest 10% 1623500 162350 Long term loan 11% 1011400 111254 Total 2634900 273604 0 weighted average interest rate 10.38% = Interest / amount of loan = 273604 / 2634900, = 10.38 % weighted average amount of accumulated expenditures 3810700 Since speccific borrowing is 2011200, interest on first 2011200 of weighted average accumulated expenditure will be applied at 12 % ( rate on specific borrowing) = 2011200 x 12%, = 241344 Interest on remaining 1799500 (3810700-2011200) will be applied at weighted average interest rate of 10.38 % = 1799500 x 10.38% = 186788 Total Avoidable interest for the project = 241344 + 186788 = 428132Related Questions
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