Question

Blossom Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $11,000,000 on January 1, 2020. Blossom expected to complete the building by December 31, 2020. Blossom has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 $4,400,000 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 3,080,000 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 2,200,000Assume that Headland completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,197,700, and the weighted-average amount of accumulated expenditures was $3,781,600. 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. Headland 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 $298,200. (Round answer to 0 decimal places, e.g. 5,275.)Depreciation Expense $

Answer 1

The avoidable interest for Blossom Furniture Company's construction project is calculated by applying the interest rates to the accumulated expenditures during construction. The depreciation expense is calculated using the straight-line method by subtracting the salvage value from the asset's cost and dividing by the useful life of the asset.

Step-by-step explanation:

To calculate the avoidable interest on the construction project for Blossom Furniture Company, we need to first determine the portion of interest cost during the period of construction that could have been avoided if the expenditure on the asset had not been made. The weighted-average amount of accumulated expenditures is given as $3,781,600. The interest rates on loans during the construction period are as follows:

• Construction loan at 12% interest ($4,400,000)
• Short-term loan at 10% interest ($3,080,000)
• Long-term loan at 11% interest ($2,200,000)

The specific calculation for the avoidable interest can be complex, considering partial capitalizations, and the specifics of the loan agreements, but it generally involves applying the respective interest rates to the weighted-average amount of accumulated expenditures, limited to the amount of borrowing costs actually incurred.

Regarding the depreciation expense calculation for the year ended December 31, 2018: The asset's cost is $5,197,700, the useful life is 30 years, and the salvage value is $298,200. The yearly depreciation expense using the straight-line method is calculated by subtracting the salvage value from the cost of the asset and then dividing the result by the asset's useful life.

Note: Since there is a discrepancy in the dates provided (construction completed in 2017 and depreciation for 2018), please verify actual completion and use dates.

Answer 2

weighted average rate: 11.14%

capitalize interest (avoidable interest) 421,270.24‬ dollars

Step-by-step explanation:

construction related loan:

4,400,000 12% = 528,000

general use:

3,080,000 10% = 308,000

2,200,000 11% = 242,000

9,680,000 1,078,000

weighted-average rate: 1,078,000 / 9,680,000 = 0.111363636 = 11.14%

capitalize interest:

weighted-average amount of accumulated expenditures x w/a rate:

3,781,600 x 11.14% = 421,270.24‬