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E10-7B (Capitalization of Interest) Bagwell Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $2,500,000 on January 1, 2012. Bagwell expected to complete the building by December 31, 2014. Bagwell has the following debt obligations outstanding during the construction period.

Construction loan—15% interest, payable semiannually, issued

December 31, 2013 $1,000,000

Short-term loan—10% interest, payable monthly, and principal payable

at maturity on May 30, 2014 700,000

Long-term loan—11% interest, payable on January 1 of each

year. Principal payable on January 1, 2018 500,000

Instructions

(Carry all computations to two decimal places.)

(a) Assume that Bagwell completed the office and warehouse building on December 31, 2014, as planned, at a total cost of $2,600,000, and the weighted average of accumulated expenditures was $1,800,000. Compute the avoidable interest on this project.

(b) Compute the depreciation expense for the year ended December 31, 2014. Bagwell 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 $150,000.

30 years and a salvage value of $150,000.