Practice Exercise 10-3 Tamarisk Industries Inc. started construction of a manufa

Question

Practice Exercise 10-3 Tamarisk Industries Inc. started construction of a manufacturing facility for its own use at an estimated cost of $9,000,000 on January 1, 2017. Tamarisk expected to complete the building by December 31, 2017. Tamarisk's debt, all of which was outstanding during the construction period, was as follows. ·Construction loan-11.00% interest, payable semiannually, issued December 31, 2016; $4,500,000 · Long-term loan #1-10.00% interest, payable on January 1 of each year. Principal payable on January 1, 2019; $1,350,000 · Long-term loan #2-12.00% interest, payable on December 31 of each year. Principal payable on December 31, 2025; $3,150,000 Assume that Tamarisk completed the facility on December 31, 2017, at a total cost of $9,270,000, and the weighted-average amount of accumulated expenditures was $6,120,000 Compute the avoidable interest on this project. Use interest rates rounded to 2 deci a laces, e g 7.58% and round fina answer to decima places, e 9- 2 Avoidable Interest s Compute the depreciation expense for the year ended December 31, 2018. Tamarisk estimated the facility's useful life to be 25 years with a salvage value of $900,000. Tamarisk elected to depreciate the facility on a straight-line basis. Depreciation Expense

Explanation / Answer

Answer:-

Calculation of Avoidable Interest:-

Calculate Interest on Remaining loan up to weighted average expenditure total using "Weighted Average Rate"

Totals

$1620000

$6,120,000

11.40%

184680

$679,680

Calculation of Weighted for non-specific loans:-

Weighted Average Rate = ($513,000÷$4,500,000)×100 = 11.40%

Therefore, the Avoidable interest = $679,680

Because, Avoidable interest is lower than actual interest use Avoidable interest

Cost = $9,000,000

Interest Capitalized = $679,680

Total Cost = $9,679,680

Depreciation Expense = ($9,679,680 - $900,000) ÷ 25 years

= $8779680 ÷ 25 years

= $351,187

Therefore, the Depreciation expense = $351,187

Weighted Average Accumulated Expenditure Interest Rate Avoidable Interest Calculate Interest on loan specifically for Construction $45,000,000 11% $495,000

Calculate Interest on Remaining loan up to weighted average expenditure total using "Weighted Average Rate"

Totals

$1620000

$6,120,000

11.40%

184680

$679,680

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