Question

Culver Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,500,000 on January 1, 2020. Culver expected to complete the building by December 31, 2020. Culver has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 $1,800,000 1,260,000 900,000 Your answer is incorrect. Assume that Culver completed the office and warehouse building on December 31, 2020, as planned at a total cost of $4,680,000, and the weighted- average amount of accumulated expenditures was $3,240,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2 decimal places, eg. 7.58% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.) Avoidable Interest $ 208367 e Textbook and Media Your answer is incorrect. Compute the depreciation expense for the year ended December 31, 2021. Culver 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 $270,000. (Round answer to 0 decimal places, e.g. 5,275.) Depreciation Expense $ 153946 e Textbook and Media

For some reason I am getting the wrong answer. Please help me find the correct answer to the above problem. Thanks.

Answer 1

Solution 1:

Weighted average interest rate on general borrowings = 10%* $1,260,000 /$2,160,000 + 11%* $900,000 / $2,160,000

= 10.42%

Avoidable interest = ($1,800,000*12%) + ($3,240,000 - $1,800,000) * 10.42%

= $216,000 + $150,048 = $366,048

Solution 2:

Total cost of building = $4,680,000 + $366,048 = $5,046,048

Depreciation expense for 2020 = (Cost - Salvage value) / Useful life = ($5,046,048 - $270,000)/30 = $159,202