Question

Sarasota Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,975,900 on January 1, 2017. Sarasota expected to complete the building by December 31, 2017. Sarasota has the following debt obligations outstanding during the construction period.

Construction loan-10% interest, payable semiannually, issued December 31, 2016		$1,988,800
Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2018		1,609,500
Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2021		996,100

1. Assume that Sarasota completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,235,200, and the weighted-average amount of accumulated expenditures was $3,818,100. Compute the avoidable interest on this project.

2. Compute the depreciation expense for the year ended December 31, 2018. Sarasota 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 $299,200

Answer 1

Weighted average rate	Principal	Rate of int	Int amt
Short-term loan-8% interest,	1,609,500	8%	128760
Long-term loan-9% interest,	996,100	9%	89649
	2,605,600		218,409
Weighted average rate
218409/2605600*100	8.38	%
c
ans 1 Avoidable interest	$352,175
	Amt	Rate of int	Int amt
Construction loan-10% interest,	$1,988,800	10%	198880
Interest on other loans (3818100-1988800)	$1,829,300	8.38%	153295
	$3,818,100		$352,175
ans 2
depreciation=(5235200+352175-299200)/30	176273
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