Ivanhoe Furniture Company started construction of a combination office and wareh
ID: 2521901 • Letter: I
Question
Ivanhoe Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,018,300 on January 1, 2017. Ivanhoe expected to complete the building by December 31, 2017. Ivanhoe has the following debt obligations outstanding during the construction period.Construction loan-12% interest, payable semiannually, issued December 31, 2016 $2,002,400 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,600,100 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 1,000,600
Explanation / Answer
Note :
A ) Interest on Construction Loan = $2,002,400 * 12% = $240,288
B ) Weighted Interest Rate =
= (Interest payable on Long term & short term loans) / (Total of Long term & short term loans)
= [ ($1,600,100 * 10 %) + ($1,000,600 *11 %) ] / ($1,600,100 + $1,000,600)
= $270,076 / $2,600,700 = 0.1038 or 10.38 %
C ) Weighted Average Interest.
= (Weighted average accumulated expenditure - Construction Loan amount ) * Weighted Interest Rate
= ($3,795,000 - $2,002,400) * 10.38 %
= $1,792,600 * 10.38 % = $186,072
Answer 1
Avoidable Interest = Interest on Construction Loan + Weighted Average Interest.
= $240,288 [ Note A] + $186,072 [ Note C] = $426,360
Answer 2
Note :
A) Actual Interest payable = ($2,002,400 * 12%) + ($1,600,100 * 10 %) + ($1,000,600 *11 %)
= $240,288 + $160,010 + $110,066 = $510,364
B) Interest amount to be capitalize = Lower of Avoidable Interest or Actual Interest
= $426,360 [ Since avoidable interest is lower ]
C ) Total cost to be captalize = Actual cost as on December 31 , 2027 + Interest amount to be capitalize
= $5,249,900 + $426,360 = $5,676,260
Depreciation Expense as per SLM = (Total Cost - Salvage Value) / Estimated useful life
= ($5,676,260 - $298,000) / 30years = $179,275
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