FAR 07 Borrowing Costs

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA.
FAR 07: BORROWING COSTS
MULTIPLE CHOICE THEORIES:
1. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is equal to
a. Actual borrowing cost incurred
b. Actual borrowing cost incurred up to the completion of asset
c. Actual borrowing cost incurred up to the completion of asset minus any investment income from the temporary
investment of the borrowing
d. Zero
2. Which of the following conditions must be met for an entity to begin capitalizing borrowing costs as part of cost of
a qualifying asset?
I. The qualifying asset being acquired, constructed or produced is for entity’s use
II. The entity incurs expenditures for the asset
III. The entity incurs borrowing costs
IV. The entity undertakes activities that are necessary to prepare the asset for its intended use
a. I, II, and III only c. II, III and IV only

b. I, II, and IV only d. I, II, III and IV
3. The period of time during which interest must be capitalized ends when
a. The asset is substantially complete and ready for its intended use
b. No further interest cost is being incurred
c. The asset is abandoned, sold or fully depreciated
d. The activities that are necessary to get the asset ready for its intended use have begun
4. When computing the amount of interest cost to be capitalized, the concept of “avoidable interest” refers to
a. The total interest cost actually incurred
b. A cost of capital charge for equity
c. That portion of total interest cost which would not have been incurred if expenditures for asset construction
had not been made
d. Portion of average accumulated expenditures on which no interest cost was incurred
5. To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset,
the entity shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate
to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs
applicable to the borrowings of the entity that are outstanding during the period
a. Including the specific borrowing
b. Other than the specific borrowing
c. Adjusted for the interest earned on temporary investment of the borrowing
d. Including the specific borrowing, adjusted for the interest earned on temporary investment of the borrowing
MULTIPLE CHOICE PROBLEMS:
1. On January 1, 2023, ASTRAL company obtained a 10%, P5,000,000 loan specifically to finance the construction of its
manufacturing plant. Expenditures on the project in 2023 follows:
January 1, 2023 1,000,000

April 1, 2023 2,500,000
December 1, 2023 1,500,000
Prior to their disbursements, some funds were invested and earned interest amounting to P100,000. The plant was
completed on December 31, 2023. Other than the P5,000,000 construction loan, the company has a P2,000,000 12%
mortgage payable.
FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 1
What is the total cost of the building on December 31, 2023?
a. P5,160,000 c. P5,400,000
b. P5,260,000 d. P5,500,000
2. In 2023, BLACKHOLE Company started the construction of a P40,000,000 new office building financed by several
long-term general borrowings which all outstanding throughout the construction period. The company’s average
incremental borrowing rate was 10%. Of the total cost of the building, P25,000,000 was incurred evenly in 2023. The
total amount of interest incurred in 2023 was P1,500,000. Of this amount, only P1,200,000 was paid.
What amount should the company report as capitalizable interest in 2023?

a. P1,200,000 c. P1,316,667
b. P1,250,000 d. P1,500,000
3. On January 1, 2023, CELESTIAL Company constructed a new plant. It estimated that the construction will run until
mid-2023. A 10% 2-year loan for P5,000,000 was obtained on January 1, 2023 to finance the construction. In addition
to the construction loan, the company also had 12%, P25,000,000 outstanding general borrowing during the
construction period. The following expenditures were incurred in 2022 and 2023:
January 1, 2022 2,000,000

April 1, 2022 5,000,000
December 1, 2022 3,000,000
March 1, 2023 6,000,000
June 1, 2023 3,000,000
June 30, 2023 1,000,000
The new plant was completed on June 30, 2023. What is the total cost of the building on June 30, 2023?
a. P20,000,000 c. P21,440,000
b. P21,023,600 d. P21,477,200
4. On March 1, 2022, DOMINATION Company obtained an 8%, P7,500,000, 15-month construction loan from a bank
and immediately started the construction of a power generation facility which was completed on May 31, 2023.the
only other loan of the company was a 10-year note obtained in 2021 for P15,000,000 with an interest rate of 6%.
Expenditures for the project in 2022 and 2023 follow:
March 1, 2022 5,500,000

April 30, 2022 2,000,000
August 1, 2022 3,500,000
December 1, 2022 1,500,000
February 1, 2023 2,500,000
May 31, 2023 3,000,000
What is the total cost of the building on May 31, 2023?

a. P18,926,785 c. P19,029,375
b. P19,014,375 d. P19,629,500
-END OF HANDOUTS-
FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 2

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FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA.

FAR 07: BORROWING COSTS

MULTIPLE CHOICE THEORIES:

a. I, II, and III only c. II, III and IV only

MULTIPLE CHOICE PROBLEMS:

January 1, 2023 1,000,000

What amount should the company report as capitalizable interest in 2023?

January 1, 2022 2,000,000

March 1, 2022 5,500,000

What is the total cost of the building on May 31, 2023?

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 2

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