Wildhorse Furniture Company started construction of a combination office and war

Question

Wildhorse Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,004,000 on January 1, 2017. Wildhorse expected to complete the building by December 31, 2017. Wildhorse has the following debt obligations outstanding during the construction period.
Construction loan-12% interest, payable semiannually, issued December 31, 2016 $1,990,900 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 1,599,600 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 995,500

Explanation / Answer

1.

weighted avg

accumulated expenditure

weighted avg rate for non specific loan

weighted avg rate = total interest / total amount *100

= 269465 / 2595100*100

=10.38%

2. depreciation expense

total cost = cost of construction + interest

=5151300 + 423018

= $ 5574318

depreciation expense = total cost - salvage value / useful life

= 5574318 - 297500 / 30

=$ 175894

calculation of avoidable interest

weighted avg

accumulated expenditure

interest rate avoidable interest interest on loan specifically for construction 1990900 12% 238908 interest on remaining loan upto weighted avg expenditure total using "weighted avg" rate 1773700 10.38 % 184110 3764600 $423018

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