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 loan—12% interest, payable semiannually, issued
December 31, 2021 ………………………………………………………………………… €2,000,000
Short-term loan—10% interest, payable monthly, and principal
payable at maturity on May 30, 2023 ……………………………………………….. 1,600,000
Long-term loan—11% 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. Compute the amount of borrowing costs to be capitalized for this project.
b. 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.
