Question

Nash Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $7,500,000 on January 1, 2020. Nash expected to complete the building by December 31, 2020. Nash has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued December 31, 2019 $3,000,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 2,100,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 1,500,000

Assume that Nash completed the office and warehouse building on December 31, 2020, as planned at a total cost of $7,800,000, and the weighted-average amount of accumulated expenditures was $5,400,000.

Required:
a. Compute the avoidable interest on this project.
b. Compute the depreciation expense for the year ended December 31, 2020.

Answer 1

a. $610,080

b. $267,002.67

Step-by-step explanation:

a. Weighted interest for short and long term loan.

Interest on short term loan = 10% * 2,100,000 = $210,000

Interest on long term loan = 11% * 1,500,000 = $165,000

Weighted interest = (210,000 + 165,000) / (2,100,000 + 1,500,000)

= 10.42%

Avoidable interest = Construction interest + ((Weighted-average amount of accumulated expenditures - Construction cost) * Weighted interest )

= (3,000,000 * 12%) + ((5,400,000 - 3,000,000) * 10.42%)

= $610,080

b. Capitalized cost = Cost to complete office and warehouse + Avoidable interest

= 7,800,000 + 610,080

= $‭8,410,080‬

Salvage value and Useful life are not included so assuming a salvage value of $400,000 and 30 years using a straight line depreciation, depreciation is;

Depreciation = ‭(8,410,080‬ - 400,000 ) / 30

= $267,002.67