1 answer

Current Attempt in Progress Nash Furniture Company started construction of a combination office and warehouse building...

Question:

Current Attempt in Progress Nash Furniture Company started construction of a combination office and warehouse building for it
Current Attempt in Progress Nash Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $9,500,000 on January 1, 2020. Nash expected to complete the building by December 31, 2020. Nash has the following debt obligations outstanding during the construction period. Construction loan-12% interest, payable semiannually, issued December 31, 2019 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021 Long-term loan 11% interest, payable on January 1 of each year. Principal payable on January 1, 2024 $3,800,000 2,660,000 1,900,000 Your answer is incorrect. Assume that Nash completed the office and warehouse building on December 31, 2020, as planned at a total cost of $9.880,000, and the weighted- average amount of accumulated expenditures was $6,840,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2 decimal places, s.7.58% for computational purposes and round final answers to decimal places, eg. 5,275.) Avoidable Interests e Textbook and Media Assistance Used Your answer is incorrect. Compute the depreciation expense for the year ended December 31, 2021. Nas elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $570,000. (Round answer to o decimal places . 5.275 Depreciation Expenses

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).

Hope you are satisfied with the answers.Please share your feedback.Thank you

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