Question

10-07

Stellar Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $12,500,000 on January 1, 2020. Stellar expected to complete the building by December 31, 2020. Stellar has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued December 31, 2019		$5,000,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021		3,500,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024		2,500,000

Assume that Stellar completed the office and warehouse building on December 31, 2020, as planned at a total cost of $13,000,000, and the weighted-average amount of accumulated expenditures was $9,000,000. 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, 2021. Stellar 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 $750,000. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

$

Answer 1

1) Avoidable interest on construction loan = Loan Amount*Loan rate

= $5,000,000*12% = $600,000

Calculation of Weighted Average Interest Rate on General Loan (Amounts in $)

Loan	Amount (A)	Interest rate (B)	Interest (A*B)
Short term loan	3,500,000	10%	350,000
Long term loan	2,500,000	11%	275,000
Total	6,000,000		625,000

Weighted Average Interest rate = $625,000/$6,000,000 = 10.42%

Avoidable Interest on Remaining Expenditure

.= (Weighted Average Accum. Exp - Construction Loan)*Weighted Avg interest rate

= ($9,000,000 - $5,000,000)*10.42% = $416,800

Total Avoidable Interest = $625,000+$416800 = $1,041,800

Therefore avoidable interest is $1,041,800.

2) Total cost of building capitalized = $13,000,000+$1,041,800

= $14,041,800

Depreciation Expense = (Cost - Salvage Value)/Useful Life

= ($14,041,800 - $750,000)/30 yrs = $443,060 per year

Therefore depreciation expense per year is $443,060.

IF ANY DOUBTS KNDLY MENTION IN COMMENT