Question

Pronghorn Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,978,200 on January 1, 2017. Pronghorn expected to complete the building by December 31, 2017. Pronghorn has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued December 31, 2016		$2,012,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018		1,615,200
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021		1,001,500

(a)

Assume that Pronghorn completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,207,200, and the weighted-average amount of accumulated expenditures was $3,811,300. 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.)

(b)

Compute the depreciation expense for the year ended December 31, 2018. Crane 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 $297,000. (Round answer to 0 decimal places, e.g. 5,275.)

Answer 1

	Weighted Average Rate for non-specific loans:
	Type	Amount	Rate	Interest
	Short term loan	1,615,200	10%	161520
	Long term loan	1,001,500	11%	110165
	Total	2616700		271685
	Average Rate	10.38	%	(271685/2616700)*100
	Calculation of Avoidable Interest	Weighted Average expenditure	Rate	Avoidable Interest
	Calculate interest on loan specifically for construction	2,012,000	12%	241440
	Calculate interest on remaining loan up to weighted average expense	1,799,300	10.38%	186767
		3811300		428207
a	The avoidable interest on this project	$428,207
b	Depreciation expense for the year ended December 31, 2018	177947	(5207200+428207-297000)/30