## Answers

**1.**Here the project is financed by 1.Construction loan (specific project realated)

2. Short term and long term loans (general loans)

Given ,the Weighted average amount of accumulated expenditure is $6,840,000

Out of the $6,840,000(Weighted-average), $3,800,000 is financed by Construction loan (specific loan). The rest i.e. $3,040,000 is financed out of the general loans. The interest rate on Construction loan (specific loan) is 12% while the weighted interest rate on the general loans is calculated below.

Loan | Principal | Rate | Annual Interest |
---|---|---|---|

short trem | 2,660,000 | 10% | 266,000 |

long term | 1,900,000 | 11% | 209,000 |

4,560,000 | 475,000 |

Weighted-average Interest Rate = | $475,000 | = 10.41% |

$4,560,000 |

The above calculations furnish us with all the data needed to arrive at an estimate of avoidable interest.

Funding | Amount | Rate | Avoidable Interest |
---|---|---|---|

Specific Loan | 3,800,000 | 12% | 456,000 |

General pool | 3,040,000 | 10.41% | 316,464 |

772,464 |

This $772,464 is the amount of interest that could have been avoided.

This much interest can be capitalized provided it doesn’t exceed the actual interest expense for the period.

**2.**Straight line depreciation is a common method of depreciation where the value of a fixed asset is reduced gradually over its useful life..

Depreciation under Straight Line Method = Initial cost of the asset **less** the estimated salvage value / estimated full useful life( in years)

here, the cost of the project = $9,880,000, useful life= 30 years, salvage value = $570,000

So Depreciation is 9,880,000 - 570,000 / 30 = $310,333..33 or $310,333 (rounded off).

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