E10.7 (LO2) (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 loan12% interest, payable semiannually, issued December 31, 2018	2,000,000
Short-term loan10% interest, payable monthly, and principal payable at maturity on May 30, 2020	1,600,000
Long-term loan11% interest, payable on January 1 of each year. Principal payable on January 1, 2023	1,000,000

Instructions

(Carry all computations to two decimal places.)

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.