Question

Coronado 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. Coronado expected to complete the building by December 31, 2020. Coronado 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 Coronado 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. Compute the avoidable interest on this project.

Compute the depreciation expense for the year ended December 31, 2021. Coronado 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 $450,000.

Answer 1

Calculation of weighted average interest rate:
Type of loan	Principal	Interest Rate	Interest
Short Term Loan-10% Interest	2,100,000	10%	210,000
Long Term Loan-11% Interest	1,500,000	11%	165,000
Total	3,600,000		375,000
Weighted Average Interest Rate=	Total Interest / Total Principal
	=375000/3600000
	=10.42%
Available Interest Calculation:
Particulars	Principal Balance of Weighted Average Accumulated Expenditure	Interest Rate	Available Interest
Interest on Loan specifically for Contruction	3,000,000	12%	360,000
Interest on remaining loan upto weighted average expenditure total using weighted average interest rate	2,400,000	10.42%	250,080
Total	5,400,000		610,080
Available Interest	$ 610,080
Calculation of Depreciation Expense:
Total Cost	=Cost Incurred + Interest Capitalised
	=7800000+610080
	=8410080
Depreciation Expense	=(Total Cost-Estimated Salvage Value)/Estimated Useful Life
	=(8410080-450000)/30
Depreciation Expense	=265336