Harrisburg Furniture Company started construction of a combination office and wa
ID: 2453390 • Letter: H
Question
Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,015,900 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 $2,015,200 Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2015 1,614,100 Long-term loan—11% interest, payable on January 1 of each year; principal payable on January 1, 2018 1,016,400.
Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as planned at a total cost of $5,216,100, and the weighted average amount of accumulated expenditures was $3,817,500. 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, 2015. Harrisburg 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 $302,600. (Round answer to 0 decimal places, e.g. 5,275.)
Depreciation Expense:
Explanation / Answer
Construction loan—12% interest, payable semiannually
Principal amount = $2,015,200
Interest = FV-PV
FV= PV *(1+Rn/m)m*t
= 2015200*(1+.12/2)2*1
= 2264278.72
Interest = 2264278.72-2015200 = 249078.72
Real interest rate = 12.36%
Short-term loan—10% interest, payable monthly
maturity on May 30, 2015
Principal amount = 1614100
Interest = FV-PV
FV= PV *(1+Rn/m)m*t
= 1614100*(1+.10/12)12*1.42
= 1859279.65
Interest = 1859279.65-1614100
= 245180
REal interest rates = 10.47
Long-term loan—11% interest, payable on January 1 of each year
principal payable on January 1, 2018 1,016,400
Interest = FV-PV
FV= PV *(1+Rn/m)m*t
= 1016400*(1+.11/1)1*4
= 1575011.46
Real interst rate = 11.57
Avoidable Interest:
245180+ 558611 = 80379.1
Depreciation Expense
Total cost of $5,216,100
Interest on loan= 249078.72
Total cost of furniture = 5216100+249078.72 = 5465178.72
Depreciation = (cost - Salvage value)/Life of asset
= (5465178.72- 302600)/30
= 172085.96
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