Culver Furniture Company started construction of a combination office and wareho

Question

Culver Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,971,900 on January 1, 2017. Culver expected to complete the building by December 31, 2017. Culver has the following debt obligations outstanding during the construction period. Construction loan-10% interest, payable semiannually, issued December 31, 2016 $1,999,900 Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,611,800 Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,006,500 Assume that Culver completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,212,300, and the weighted-average amount of accumulated expenditures was $3,779,200. 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, 2018. Culver 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 $302,700. (Round answer to 0 decimal places, e.g. 5,275.) Depreciation Expense $

Explanation / Answer

Computation of avoidable interest: Weighted average accumulated expenditure Rate Available interest Interest on loan specific to construction 1999900 10% 199990 Interest on remaining loan 1779300 8.38% 149105 (3779200-1999900) (Note:1) 349095 Total avoidable interest=349095 Computation of weighted average rate: Type Amount Rate Interest Short-term loan 1611800 8% 128944 Long-term loan 1006500 9% 90585 Total 2618300 219529 Weighted average rate=Total interest/Total principal=(219529/2618300)*100=8.38% Computation of depreciation under straight line method: Amount of building to be capitalized=Original cost+interest to be capitalised (Note:2) Amount of building to be capitalized=4971900+349095=5320995 Depreciation under straight-line method=(Original cost-Salvage value)/Useful life=(5320995-302700)/30=$167276.50 Deprection expenses=$167276.50 2.Computation of interest to be capialized Computation of actual amount of interest: Type Amount Rate Interest Construction loan 1999900 10% 199990 Short-term loan 1611800 8% 128944 Long-term loan 1006500 9% 90585 Total 4618200 419519 Avoidable interest is less than actual interest.Hence,interest to be capialized=Avoidable interest cost=349095

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