Answer:
(a) $406,720
(b) $176,891
Explanation:
(a) (i) Interest payable on short term loan in 2020:
= 1,400,000 × 10%
= $140,000
Interest payable on long term loan in 2020:
= 1,000,000 × 11%
= $110,000
Weighted average interest rate:
= [(Interest payable on short term loan + Interest payable on long term loan) ÷ (1,400,000 + 1,000,000)] × 100
= [($140,000 + $110,000) ÷ (1,400,000 + 1,000,000)] × 100
= ($250,000 ÷ 2,400,000) × 100
= 10.42%
(ii) Avoidable interest on this project:
= (2,000,000 × 12%) + [(3,600,000 - 2,000,000) × 10.42%]
= 240,000 + 166,720
= $406,720
(b) Total capitalization cost:
= Cost to complete the construction + Avoidable interest
= $5,200,000 + $406,720
= $5,606,720
Depreciation:
= (Total capitalization cost - Salvage value) ÷ Estimated life
= ($5,606,720 - $300,000) ÷ 30
= $5,306,720 ÷ 30
= $176,891
