Harrisburg Furniture Company began construction of a new $5,017,700 office and warehouse building on January 1, 2014, with plans to complete it by December 31, 2014. During construction, Harrisburg had outstanding debt obligations including a $1,612,800 short-term loan at 10% interest and a $1,016,200 long-term loan at 11% interest.

1. 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
Solution
Hi,
Please find the detailed answer as follows:
Part A:
Weighted Interest Rate = Interest/Principal*100 = 273062/2629000*100 = 10.39%
Calculation of Avoidable Interest
Avoidable Interest = $428894.92 or $428895
Part B:
We will use avoidable interest ($428894.92) since it is lower than the value of actual interest
($514646).
Depreciation Expense = (Total Planned Cost + Avoidable Interest) - Salvage Value/Estimated
Life = (5217300 + 428894.92) - 300300/30 = $178196.50 or $178197.
Thanks.
Weighted Average Interest Rate Computation
Principal Interest
10% Short Term Loan 1612800 161280
11% Long Term Loan 1016200 111782

2. Total 2629000 273062