E10-7

Instructions

Prepare the entry that should have been made at the date of each acquisition.

E10-7 (Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2014. Harrisburg expected to complete the building by December 31, 2014. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan12% interest, payable semiannually, issued December 31, 2013 $2,000,000

Short-term loan10% interest, payable monthly, and principal payable at maturity on May 30, 2015. $1,400,000

Long-term loan11% interest, payable on January 1 of each year. Principal payable on

January 1, 2018 $1,000,000

(Carry all computations to two decimal places.)

(a)Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project.

(b) Compute the depreciation expense for the year ended December 31, 2015. Harrisburg 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 $300,000