Question

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

Skysong Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \$13,000,000 on January 1, 2020. Skysong expected to complete the building by December 31, 2020. Skysong has the following debt obligations outstanding during the construction period.

 Construction loan-12% interest, payable semiannually, issued December 31, 2019 \$5,200,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 3,640,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 2,600,000

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Assume that Skysong completed the office and warehouse building on December 31, 2020, as planned at a total cost of \$13,520,000, and the weighted-average amount of accumulated expenditures was \$9,360,000. 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 \$

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Compute the depreciation expense for the year ended December 31, 2021. Skysong 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 \$780,000. (Round answer to 0 decimal places, e.g. 5,275.)

 Depreciation Expense \$

a) Avoidable interest = 1056472

WAAE: = 9,360,000

1. Find interest rate for other debt
- Short term: (3,640,000 x 0.10) = 364,000
- Long term: (2,600,000 x 0.11) = 286,000
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Total expenditures = 6,240,000
Total Interest expense: 650,000

(650,000/6,240,000) = 10.42%

2. Calculate avoidable interest
- Construction loan: (5,200,000 x 0,12% = 624,000
- Other debt: (4,160,000 x 0.1042) = 433472
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Total avoidable interest: 1056472

b) Calculate depreciation expense

Total building cost:
=13,500,000
+ 1056472
-------------------------
Total building cost = 14,576,472

=(14576472-780000) / 30 = 459882.4

= 459882

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