Jennifer Cosmetics wants to construct a new building. It has two building options, as follows:
a. Hire a contractor to do all the work. Jennifer has a bid of $850,000 from a reputable contractor to complete the project.
b. Construct the building itself by taking out a construction loan of $800,000. Using this alternative, Jennifer believes materials and labor will cost $800,000, and interest on the construction loan will be calculated as follows:
$200,000 @ 12% for 9 months
$300,000 @ 12% for 6 months
$200,000 @ 12% for 3 months
Required:
1. What will be the recorded cost of the building under each alternative?
2. Assuming the building is depreciated over a 20-year period using straight-line depreciation with no salvage value, how much is the annual depreciation expense under each alternative? $100,000 @ 12% for 1 month.