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ID: 2450858 • Letter: W
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Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,017,700 on January 1, 2014. Harrisburg expected to complete the building by December 31, 2014. Harrisburg has the following debt obligations outstanding during the construction period.Construction loan—12% interest, payable semiannually, issued December 31, 2013 $2,016,600 Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2015 1,628,400 Long-term loan—11% interest, payable on January 1 of each year; principal payable on January 1, 2018 1,021,900
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Explanation / Answer
Please find the detailed answer as follows: Part A: Weighted Average Interest Rate Computation Principal Interest 10% Short Term Loan 1628400 162840 11% Long Term Loan 1021900 112409 Total 2650300 275249 Weighted Interest Rate = Interest/Principal*100 = 275249/2650300*100 = 10.38% Calculation of Avoidable Interest Weighted Average Accumulated Expenditures Interest Rate Avoidable Interest 2016600 12% 241584 2650300 10.39% 275366.17 516950.17 Avoidable Interest = $516,950.17 Part B: Actual Interest Table Principal Interest Rate Actual Interest Construction Loan 2016600 12% 241992 Short Term Loam 1628400 10% 162840 Long Term Loan 1021900 11% 112409 Total 4666900 517241 We will use avoidable interest ($516950.17) since it is lower than the value of actual interest ($517241). Depreciation Expense = (Total Planned Cost + Avoidable Interest) - Salvage Value/Estimated Life = (5212000 - 3817700) - 314,100/30 = $180495.
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