Question - Capitalization of Interest
McPherson Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $7,280,000 on January 1, 2010. McPherson expected to complete the building by December 31, 2010. McPherson has the following debt obligations outstanding during the construction period.
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Construction loan-12% interest, payable semiannually, issued December 31, 2009
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$2,800,000
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Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2011
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1,960,000
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Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2014
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1,400,000
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(a) Assume that McPherson completed the office and warehouse building on December 31, 2010, as planned at a total cost of $7,280,000, and the weighted average of accumulated expenditures was $5,040,000. Compute the avoidable interest on this project.
(b) Compute the depreciation expense for the year ended December 31, 2011. McPherson 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 $420,000.