QUESTION 1
On 1 January 20X6 Stremans Co borrowed $1.5m to finance the
production of two assets, both of which were expected to take a year to build.
Work started during 20X6. The loan facility was drawn down and incurred on 1
January 20X6, and was utilised as follows, with the remaining funds invested
temporarily.
Asset A Asset
B
$'000 $'000
1 January 20X6 250 500
1 July 20X6 250 500
The loan rate was 9% and Stremans Co can invest surplus funds at
7%.
Required
Ignoring compound interest, calculate the borrowing costs which
may be capitalised for each of the assets and consequently the cost of each
asset as at 31 December 20X6.
QUESTION 2
Acruni Co had the following loans in place at the beginning and
end of 20X6.
1 January 31
December
20X6 20X6
$m $m
10% Bank loan repayable 20X8 120 120
9.5% Bank loan repayable 20X9 80 80
8.9% debenture repayable 20X7 – 150
The 8.9% debenture was issued to fund the construction of a
qualifying asset (a piece of mining equipment), construction of which began on
1 July 20X6.
On 1 January 20X6, Acruni Co began construction of a qualifying
asset, a piece of machinery for a hydroelectric plant, using existing
borrowings. Expenditure drawn down for the construction was: $30m on 1 January
20X6, $20m on 1 October 20X6.
Required
Calculate the borrowing costs that can be capitalised.
Answer
Question 3
An entity already has a number of general loan arrangements:
Loan 1 of $800,000, interest paid at 9%;
Loan 2 of $2 million, interest paid at 8%; and
Loan 3 of $400,000, interest paid at 7.5%.
The entity has commissioned a new printing press to be constructed
on its behalf. The total cost will be $800,000 and the entity will be able to
fund the purchase from its existing borrowings since it has arranged for stage
payments to be made. The construction takes six months.
Required
Calculate the borrowing costs that can be capitalised and the
total cost of the printing press.
Question 4
An entity borrowed $5 million to fund the construction of a new
building. Interest is payable on the loan at 8%. Stage payments were due
throughout the construction period and therefore excess funds were reinvested
during that period. By the end of the project investment income of $150,000 had
been earned and the construction took twelve months to complete.
Required
Calculate the borrowing costs that can be capitalised
and the total cost of the building.
Question 5
The following events take place:
An entity buys some land on 1 December.
Planning permission is obtained on 31 January.
Payment for the land is deferred until 1 February.
The entity takes out a loan to cover the cost of the land and
the construction of the building commenced on 1 February.
Due to adverse weather conditions there is a delay in starting
the building work for six weeks and work does not commence until 15 March.
Required
What date should capitalisation of borrowing cost commenced?
In the above scenario the key dates
are:
Expenditure on the acquisition is
incurred on 1 February when construction commences.
Borrowing costs start to be
incurred from 1 February.
Although work was being
undertaken on planning permission etc. during December and January, no
borrowing costs were incurred during this period.
During the six-week inactive
period borrowing costs should not be capitalised.
Capitalisation of borrowing costs
should commence from 15 March.
Question 6
Concorde Inc. obtained a term loan during the year ended December
31, 2008, amounting to $650 million for modernization and development of its
factory. During the year, buildings costing $120 million were completed and
plant and machinery amounting to $350 million were installed.
A sum of $70 million has been given as a capital commitments
advance for assets, the installation of which is expected in the following
year. The amount of $110 million has been utilized for working capital
requirements.
Interest incurred on the loan of $650 million during the year
ended December 31, 2008, amounted to $58.5 million.
Required
How should the interest amount of $58.5 million be treated in the
financial statements of XYZ Inc.?
Interest
incurred amounting to $58.5 million should be apportioned using the amounts of
loan utilized for various purposes. Except for the portion of the loan that was
used for working capital requirements ($110 million), the rest was utilized for
the construction of qualifying assets, and therefore the borrowing costs
eligible for capitalization will be
$(650 – 110)/650 × 58.5 million = $48.6
million.
Question 7
Funto Construction has three sources of borrowings:
Average Loan Interest
Expenses
N N
7 Years Loan 8,000,000
800,000
10 Years Loan 10,000,000 900,000
Bank Overdraft 10,000,000 900,000
The 7 year loan has been specifically raised to fund the building
of a qualifying assets.
The company has incurred the following expenditure on a project
funded from general borrowings for the year 31st December 2014:
Date
Incurred Amount
N
31st
March 1,000,000
31st
July 1,200,000
30th
October 800,000
Required
Determine the weighted average and the amount that will be
capitalised.
Question 8
Lala Plc, a geared company has the following loan arrangements as
at 1st January 2011:
Average Loan
N
7%Loan notes 55,000,000
8% Loan notes 110,000,000
12% Debentures
85,000,000
10% Bank Loan 150,000,000
On the 1st of January 2011, the company commenced the
construction of a new office factory. The construction of the factory will cost
N100,000,000 and the company funded the construction with the existing
borrowings. The factory was completed on 31st August 2011 but was
not available for use until 1st December 2011 as a result of minor
modification. During the construction period, active work was interrupted and
the building construction was stopped for two months as a result of adverse
weather conditions.
Required
Calculate the borrowing cost to be capitalised and the cost of the
building to be recognised upon initial recognition.
