Reference no: EM132476607
Problem - Capitalization of Interest
McPherson Furniture started construction of a combination office and warehouse building for its own use at an estimated cost of €5,000,000 on January 1, 2019. McPherson expected to complete the building by December 31, 2019. McPherson has the following debt obligations outstanding during the construction period.
Construction loan-12% interest, payable semiannually, issued December 31, 2018 €2,000,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2020 1,600,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2023 1,000,000
Required -
a. Assume that McPherson completed the office and warehouse building on December 31, 2019, as planned at a total cost of €5,200,000, and the weighted-average accumulated expenditures was €3,800,000. Compute the avoidable interest on this project.
b. Compute the depreciation expense for the year ended December 31, 2020. 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 residual value of €300,000.