Question
I am your client and am in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. In
I am your client and am in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. In order to finance the construction, a significant construction loan will be taken out with a lender and at the end of this construction, the loan will be converted into a long-term note payable.
The cost of construction, excluding any consideration of interest, is expected to run $5,000,000 and the building will be depreciated over 39 years using the straight-line method.
The total amount financed will be $4,000,000 with construction draws to be taken in two disbursements: $2,500,000 on April 1, 2020 and $1,500,000 at July 1, 2020. Interest only payments will be due monthly during the construction phase with interest at 6%. The first payment will be due April 30, 2020. Construction is expected to be completed December 31, 2020. At completion of the construction phase, the converted long-term debt will be payable in 84 monthly installments of principal and interest, with a 20-year amortization and balloon payment at maturity. You have been provided an amortization schedule that includes projected interest costs during construction and then over the life of the permanent financing.
- What is the expected impact on the balance sheet and income statement from both the building addition and the financing costs for the periods to include the anticipated 1 year construction loan period and then the anticipated 7 year permanent financing arrangement? Assume no loan costs exist for this arrangement.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started