E10.7 (LO 2) (Capitalization of Borrowing Costs) 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, 2022. McPherson expected to complete the building by December 31, 2022. McPherson has the following debt obligations outstanding during the construction period. Construction loan12% interest, payable semiannually, issued December 31, 2021 2,000,000 Short-term loan10% interest, payable monthly, and principal payable at maturity on May 30, 2023 1,600,000 Long-term loan11% interest, payable on January 1 of each year. Principal payable on January 1, 2026 1,000,000 Instructions (Carry all computations to two decimal places.)

a. Assume that McPherson completed the office and warehouse building on December 31, 2022, as planned at a total cost of 5,200,000. The following expenditures were made during the period for this project: January 1, 1,000,000; April 1, 1,500,000; July 1, 2,000,000; and October 1, 700,000. Excess funds from the construction loans were invested during the period and earned 20,000 of investment income.

b. Compute the amount of borrowing costs to be capitalized for this project. Compute the depreciation expense for the year ended December 31, 2023. 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.