Flint Furniture Company started construction of a combination office and warehou
ID: 2550633 • Letter: F
Question
Flint Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,035,800 on January 1, 2017. Flint expected to complete the building by December 31, 2017. Flint has the following debt obligations outstanding during the construction period.
Construction loan-12% interest, payable semiannually, issued December 31, 2016 $1,991,900
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,607,900
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,004,700
A. Assume that Flint completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,186,100, and the weighted-average amount of accumulated expenditures was $3,832,900. Compute the avoidable interest on this project.
B. Compute the depreciation expense for the year ended December 31, 2018. Flint 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 $301,600
Explanation / Answer
Weighted average Accumulated expenditures Inrterest Rate Avoidable Interest 1,991,900 12% 239028 1,841,000 10.38% 191180 3,832,900 430,208 Weighted-average interest rate computation Principal Interest 10%short term 1,607,900 160790 11% Long term 1,004,700 110517 2,612,600 271,307 Total Interest/ Total Principal 271307/ 2612600 10.38% Actual Interest Construction Loan 1,991,900 12% 239028 Short-term Loan 1,607,900 10% 160790 Long-term Loan 1,004,700 11% 110517 Total 510335 Because avoidable interest is lower than actual interest, use avoidable interest Cost 5,186,100 Interest capitalized 430,208 Total Cost 5,616,308 Depriciation Expense (5616308-301600)/30 177157
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