Question

# 10-07 Stellar Furniture Company started construction of a combination office and warehouse building for its own...

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 \$

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

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