Turner Co. owned a warehouse and then decided to build a new automated racking system in the warehouse. They began construction of the system on January 1, 2012. The project was completed on December 31, 2012 and placed into service on 1/1/2013. Payments to the contractors were made as follows:
January 1, 2012 $ 50,000
April 1, 2012 $590,000
October 1, 2012 $ 270,000
On April 1, 2012, the company obtained a $480,000, 6% annual interest rate construction loan. The loan was outstanding for the entire construction period.
The other interest bearing debt of the company included two long-term notes of $180,000 and $120,000 with interest rates of 4% and 5% respectively. The loans were outstanding for the entire year.
To save you time- I am going to give you avoidable interest for these facts. (but you might want to try to compute it to see if you get it right, too!) Avoidable interest for 2012 is $32,320.
The racking system has an estimated useful life of 10 years and an estimated residual value of $100,000. Turner computes depreciation for short years using the nearest full month as the convention. Turner uses the double declining balance method.
1. Assume all interest payments for 2012 are made in cash on December 31, 2012. What is the total interest paid in cash by Turner on 12/31/2012? (This is “actual interest”).
You type 1. #put your final answer here# (then show your work after under that)
2. What is the amount of interest capitalized for 2012?
You type 2. #put your final answer here# (then show your work after under that)
3. How much interest expense will Turner report on its income statement for 2012?
You type 3. #put your final answer here# (then show your work after under that)
4. What is acquisition cost for the racking system based on the information we have?
Preview of Turner_Co._Problem_Solution_.xlsx