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Cullumber Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,950,000 on January 1, 2017. Cullumber expected to complete the building by December 31, 2017. Cullumber has the following debt obligations outstanding during the construction period.
Construction loan-10% interest, payable semiannually, issued December 31, 2016 $1,989,400 Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,591,100 Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2021 993,800

Explanation / Answer

Answer a

Note :

Out of the weighted-average amount of accumulated expenditures was $3,768,500 , the specific loan ie Construction loan-10% is to be taken at full ie $1,989,400 & the rest amount ie $1,779,100 ($3,768,500 - $1,989,400) is consider as non - specific loan . The avidable interest for non - specific loan is calculated using weighted average interest rate.

Computation of Weighted Average Interest Rate

Weighted Average Interest Rate = Total Interest / Total Principal = $216,730 / $2,584,900 = 8.38 %

Avoidable Interest = Weighted-average amount of accumulated expenditures * Interest Rate

Computation of Avoidable Interest

Answer b

Compuation of Actual Interest paid for different loans

Avoidable Interest = $348,029 ; Actual Interest = $415,670.

Note : Since avoidable Interest is less than the actual interest paid , therefore the amount of avoidable interest shall capitalize and added to cost of asset.

Total Cost of Building = $5,211,800 + $348,029 = $5,559,829

Useful life = 30 years ; Salvage value = $299,800

Depreciation Expense = Cost - Salvage value / useful life = ($5,559,829 - $299,800) / 30years = $175,334

Type of Non - Specific Loan Principal ($) Interest ($) Short-term loan-8% interest 1,591,100 127,288 Long-term loan-9% interest 993,800 89,442 Total 2,584,900 216,730

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