Question

Sandhill 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. Sandhill expected to complete the building by December 31, 2017. Sandhill 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

Assume that Sandhill 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.)

Avoidable Interest $

Compute the depreciation expense for the year ended December 31, 2018. Sandhill 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 $301,200. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense $

Answer 1

Solution:

Weighted average accumulated expenditure = $3,811,300

Specific borrowings for entire year = $2,012,000

General borrowing used in construction of building = $3,811,300 - $2,012,000 = $1,799,300

Weighted average interest rate to be used for interest capitalzation purpose for general borrowings = 10% * 1615200/2616700 + 11% * 1001500 / 2616700 = 10.38%

Avoidable interest for Sandhill company = $2,012,000 * 12% + $1,799,300 * 10.38% = $428,207

Total cost of building = Cost incurred + Interest capitalized = $5,207,200 + $428,207 = $5,635,407

Residual value of building after 30 year = $301,200

Depreciable cost = $5,635,407 - $301,200 = $5,334,207

Useful life = 30 years

Depreciation expense for the year ended Dec 31, 2018 = $5,334,207 / 30 = $177,807