E10-7B (L03) (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, 2017. Bagwell expected to complete the building by December 31, 2017. Bagwell has the following debt obligations outstanding during the construction period.

Instructions

(Carry all computations to two decimal places.)

1. (a) Assume that Bagwell completed the office and warehouse building on December 31, 2017, 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. (Round interest rates to two decimal places.)

2. (b) Compute the depreciation expense for the year ended December 31, 2018. 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.

Construction loan-15% interest, payable semiannually, issued December 31, 2016 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 $1,000,000 700,000 500,000