Question

# Pronghorn Furniture Company started construction of a combination office and warehouse building for its own use...

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.)

 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

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