Kieso, Intermediate Accounting, 16e Intermediate Accounting (ACCT 3110, 312 ice
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Kieso, Intermediate Accounting, 16e Intermediate Accounting (ACCT 3110, 312 ice Gradebook ORION Downloadable eTextbook ment FULL SCREEN Exercise 10-7 Harrisburg Furniture Company started construction of a combination office and warehouse building for Rs own use at an estimated cost of $5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017 Harrisburg has the following debt obligations outstanding during the construction period Construction loan-12% interest, payable semiannually, issued December 31, 2016 Short-term loan, 10% interest, payable monthly, and principal payable at maturity on May 30, 2018 Long-term loan, 11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 $2,000,000 1,400,000 1,000,000 Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,200,000, and the weighted-average amount of a cumulated expenditures was $3,600,000. Compute the avoidable interest on this project use a terest rates romded to 2 decimar places, e-9 7.58% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.) Avoidable Interest s Com4nAe the d tredat on e pense for the year ended December 31 2018 Harst ro elected to depreciate the buki ng on a strai t line b sis and c etern ene that the asset ha. " I useful e or 30 years and a saivage value of S 300,000. (Round answer to o decimal places, e.g S,275.) Depreciation ExpenseExplanation / Answer
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
$2,000,000
12%
$240,000
1,600,000
10.42%
166,720
$3,600,000
$406,720
Weighted-average interest rate computation
Principal
Interest
10% short-term loan
$1,400,000
$140,000
11% long-term loan
1,000,000
110,000
$2,400,000
$250,000
Total Interest
=
$250,000
= 10.42%
Total Principal
$2,400,000
(b)
Actual Interest
Construction loan
$2,000,000 X 12% =
$240,000
Short-term loan
$1,400,000 X 10% =
140,000
Long-term loan
$1,000,000 X 11% =
110,000
Total
$490,000
Because avoidable interest is lower than actual interest, use avoidable interest.
Cost
$5,200,000
Interest capitalized
406,720
Total cost
$5,606,720
Depreciation Expense
=
$5,606,720 – $300,000
= $176,891
30 years
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
$2,000,000
12%
$240,000
1,600,000
10.42%
166,720
$3,600,000
$406,720
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