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    Borrowing Cost Practice Set

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    Mary Nichole Sayde
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    Borrowing Cost Practice Set

    Uploaded by

    Mary Nichole Sayde
    6 views3 pages
    This is a quick note

    Original Title

    9.-Borrowing-cost-practice-Set (1)

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    6 views3 pages

    Borrowing Cost Practice Set

    Uploaded by

    Mary Nichole Sayde
    This is a quick note

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    BORROWING COST

    Under PAS 23, paragraph 5, borrowing costs are defined as interest and
    other costs that an entity incurs in connection with borrowing of funds.

    QUALIFYING ASSET – is an asset that necessarily takes a substantial period


    of time to get ready for the intended use or sale.
    Examples include the following:
    a. Manufacturing plant
    b. Power generation facility
    c. Intangible asset
    d. Investment property

    1.) On January 1, 2019, Henry Company borrowed P6,000,000 at an annual interest rate of
    10% to finance specifically the cost of building an electricity generating plant. Construction
    commenced on January 1, 2019 with a cost P6,000,000.
    Not all the cash borrowed was used immediately, so interest income of P80,000 was
    generated by temporarily investing some of the borrowed funds prior to use. The project was
    completed on November 30, 2019. What is the carrying amount of the plant on November 30,
    2019?
    Solution:
    Construction cost 6,000,000
    Interest (6,000,000 x 10% x 11/12) 550,000
    Interest income ( 80,000)
    Total cost of plant 6,470,000

    Discussion

    Asset financed by specific borrowing


    PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of
    acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual
    borrowing cost incurred during the period less any investment income from the temporary
    investment of those borrowings.
    2.) Smile Company was constructing an asset that qualified for interest capitalization. The
    construction began at the beginning of the current year and was completed at the end of
    current year.
    The construction cost totaled P12,000,000 and was incurred evenly during the current year.
    The entity had outstanding notes payable during the entire year of construction comprising
    P6,000,000 8% interest and P9,000,000 9% interest. None of the borrowings were specified
    for the construction of the qualified asset.
    a. What amount of interest should be capitalized?
    b. What amount should be reported as interest expense for the current year?
    Discussion

    Asset financed by general borrowing


    PAS 23, paragraph 14, provides that if the funds are borrowed generally and used for acquiring
    a qualifying asset, the amount of capitalizable borrowing cost is equal to the average carrying
    amount of the asset during the period multiplied by a capitalization rate or average interest
    rate.
    However, the capitalizable borrowing cost shall not exceed the actual interest incurred.
    The capitalization rate or average interest rate is equal to the total annual borrowing cost
    divided by the total general borrowings outstanding during the period.
    No specific guidance is provided for general borrowing with respect to investment income.
    Accordingly, any investment income from general borrowing is not deducted from capitalizable
    borrowing cost.
    a. What amount of interest should be capitalized?
    Principal Interest
    8% note payable (8% x 6,000,000) 6,000,000 480,000
    9% note payable (9% x 9,000,000) 9,000,000 810,000
    Total 15,000,000 1,290,000

    Average interest rate (1,290,000/15,000,000) 8.6%

    Average expenditures (12,000,000/2) 6,000,000


    Capitalizable interest (6,000,000 x 8.6%) 516,000

    b. What amount should be reported as interest expense for the current year?
    Total interest incurred 1,290,000
    Capitalizable interest (516,000)
    Interest expense for the year 774,000

    All other borrowing costs shall be expensed as incurred – in other words, if the borrowing is
    not directly attributable to a qualifying asset, the borrowing cost is expensed immediately.
    3.) One Company had loans outstanding during 2019 and 2020
    Specific construction loan 2,000,000 10%
    General loan 15,000,000 12%

    The entity began the self-construction of a new building on January 1, 2019 and the building
    was completed on December 31, 2018.
    Expenditures during 2017 and 2018 were:
    January 1, 2019 2,000,000
    July 1, 2019 4,000,000
    November 1, 2019 3,000,000
    July 1, 2020 1,000,000
    a. What amount of interest should be capitalized during 2019? 500,000
    b. What is the cost of the new building on December 31, 2019? 9,500,000
    Expenditure Months Amount
    January 1, 2019 2,000,000 12/12 2,000,000
    July 1, 2019 4,000,000 6/12 2,000,000
    November 1, 2019 3,000,000 2/12 500,000
    9,000,000 4,500,000

    Average expenditures in 2019 4,500,000


    Applicable to specific loan (2,000,000)
    Applicable to general loan 2,500,000

    Actual expenditures in 2019 9,000,000


    Capitalizable interest in 2019:
    Specific (2,000,000 x 10%) 200,000
    General (2,500,000 x 12%) 300,000
    Total cost of new building – Dec 31, 2019 9,500,000

    PAS 23, paragraph 18, provides that the average expenditures during a period shall include
    the borrowing costs previously capitalized.

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