Mircha ala s H b of Acco ntanc

IAS 23: Borrowing Costs

Question#1:
During the current year an entity had in place $1 million of 6% loan finance and $2 million of 8% loan
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finance.
It constructed a new factory which cost $600,000 and this was funded out of the existing loan finance.
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The factory took 8 months to complete.

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To the nearest thousand, what borrowing costs should be capitalised?

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C. $28,000
D. $24,000
Question#2: →
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Gilbert took out a $7.5 million 10% loan on 1 January 20X6 to build a new warehouse during the year.
Construction of the warehouse began on 1 February 20X6 and was completed on 30I
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November 20X6.
As not all the funds were needed immediately, Gilbert invested $2 million in 4.5% bonds from 1 January
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to 1 May 20X6.
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What are the total borrowing costs to be capitalised in respect of the warehouse $________?6025
-Question#3:
Capita had the following bank loans outstanding during the whole of 20X8:
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9% loan repayable 20X9 15
11% loan repayable 20Y2 24
Capita began construction of a qualifying asset on 1 April 20X8 and withdrew funds of $6 million on that
date to fund construction.
On 1 August 20X8 an additional $2 million was withdrawn for the same purpose.
Calculate the borrowing costs which can be capitalised in respect of this project for the year ended 31
December 20X8.
Inmost
7500×104×1,03=625
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-

A. $544,000 .

B. $472,500
C. $750,000
D. $350,000
Question#4: -
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Leclerc has borrowed $2.4 million to finance the building of a factory. Construction is expected to take #
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two years. The loan was drawn down and incurred on 1 January 20X9 and work began on 1 March 20X9.
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$1 million of the loan was not utilised until 1 July 20X9 so Leclerc was able to invest it until needed.
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Leclerc is paying 8% on the loan and can invest surplus funds at 6%.
Calculate the borrowing costs to be capitalised for the year ended 31 December 20X9 in respect of this

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project.
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A. $140,000
B. $192,000
C. $100,000
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Intent 2400×84,12=160
D. $162,000

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From the desk of Sir Mustafa Ahmed Mirchawala: Page 1
 Mircha ala s H b of Acco ntanc

Question#5:
A company has the following loans in place throughout the year ended 31 December 20X8.

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10% bank loan 140 wit
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8% bank loan 200

during 20X9.
What amount should be capitalised as borrowing costs at 31 December 20X8 in respect of this asset?
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A. $5.6 million

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B. $2.8 million
C. $4.4 million
D. $2.2 million
✓
MTQ:
Apex is a publicly listed supermarket chain. During the current year it started the building of a new store.
The directors are aware that in accordance with IAS 23 Borrowing costs certain borrowing costs have to
be capitalised.
Details relating to construction of Apex's new store:
Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April 20X8.
The loan is redeemable at a premium which means the loan has an effective finance cost of 7.5% per
annum. The loan was specifically issued to finance the building of the new store which meets the
definition of a qualifying asset in IAS 23. Construction of the store commenced on 1 May 20X8 and it was
completed and ready for use on 28 February 20X9, but did not open for trading until 1 April 20X9.

1. Apex's new store meets the definition of a qualifying asset. Which of the following describes a
qualifying asset?
A. An asset that is ready for use or sale when purchased
B. An asset that takes over 12 months to get ready for use or sale
C. An asset that is intended for use rather than sale
D. An asset that takes a substantial period of time to get ready for use or sale

2. Apex issued the loan stock on 1 April 20X8. Three events or transactions must be taking place for
capitalisation of borrowing costs to commence. Which one of the following is NOT one of these?
A. Expenditure on the asset is being incurred
B. Borrowing costs are being incurred
C. Physical construction of the asset is nearing completion
D. Necessary activities are in progress to prepare the asset for use or sale

3. What is the total of the finance costs which can be capitalised in respect of Apex's new store?
A. $625,000
B. $750,000
C. $600,000
D. $500,000

From the desk of Sir Mustafa Ahmed Mirchawala: Page 2

4. Rather than take out a loan specifically for the new store Apex could have funded the store from
existing borrowings which are:
(i) 10% bank loan $50 million
(ii) 8% bank loan $30 million
In this case it would have applied a 'capitalisation rate' to the expenditure on the asset. What would
that rate have been?
A. 10%
B. 8.75%
C. 9%
D. 9.25%

5. If Apex had been able to temporarily invest the proceeds of the loan from 1 April to 1 May when
construction began, how would the proceeds be accounted for?
A. Deducted from finance costs
B. Deducted from the cost of the asset
C. Recognised as investment income in the statement of profit or loss
D. Deducted from administrative expenses in the statement of profit or loss

From the desk of Sir Mustafa Ahmed Mirchawala: Page 3