Borrowing Costs

BORROWING COSTS
DISCUSSION EXERCISES
STRAIGHT PROBLEMS
1. ALADDIN INC. borrowed P20 million to finance the construction of a new building at the
beginning of 2021 with a nominal interest rate at 12% per annum. Disbursements for
construction costs were staggered throughout the construction period. Hence, investment
income from excess funds was earned until December 31, 2021 amounting to P400,000.
REQUIREMENTS: (a) Determine the capitalizable borrowing cost; (b) What is the total cost of
PPE? Assuming: (1) The construction was completed on December 31, 2021; (2) The
construction was completed on September 30, 2021.
2. On January 1, 2021 ARIEL CORP. had the following borrowings made for general purposes, a part
of proceeds was used to finance the construction of a new building.
10% long-term note P4,000,000
12% bank loan 2,000,000
8% short-term note 2,000,000
The construction started on January 1, 2021 and the warehouse was completed on December
31, 2021 with total construction costs of P2,200,000.
REQUIREMENTS: Compute the capitalizable borrowing cost and cost of the new building under
the following assumptions:
(a) Assuming the expenditures of the construction were incurred as follows:
January 1 P400,000
April 1 600,000
June 30 800,000
October 1 200,000
December 31 200,000
(b) Assuming the expenditures of the construction amounting were incurred evenly during
the year.
3. On February 3, 2021, BELLE COMPANY started to construct a new building at a total contract
price of P1,500,000. The building was completed on July 31, 2021 with an estimated useful life
of 10 years. The expenditures on building were made as follows:
February 5, 2021 P600,000
April 2, 2021 300,000
May 4, 2021 400,000
July 31, 2021 200,000
The following were the borrowings made by the company which are all outstanding from
January 1 to December 31, 2021,
Principal Borrowing cost
10% bank loan 800,000 80,000
10% short-term note 1,600,000 160,000
12% long-term loan 2,000,000 240,000
4,400,000 480,000
The 10% bank loan relates specifically to finance the construction of the building. P9,000
interest income was earned until June 30, 2021 from temporarily investing the funds to bond
investments.
REQUIREMENTS: Under the traditional approach and contemporary approach, determine the
following:
(a) What is the borrowing cost to be capitalized as cost of new building?
(b) What is the amount of expense to be presented in profit or loss for the year 2021 on the
above transactions?
4. BAMBI INC. had loans outstanding during 2021 and 2022.
Specific construction loan 1,000,000 10%
General loan 7,500,000 12%
The entity began the self-construction of a new building on January 1, 2021 and the building was
completed on December 31, 2022. Expenditures during 2021 and 2022 were:
January 1, 2021 1,000,000
July 1, 2021 2,000,000
November 1, 2021 1,500,000
July 1, 2022 500,000
REQUIREMENT: What is the cost of the new building on December 31, 2021 and December 31, 2022?
MULTIPLE CHOICE (THEORIES)

1. Which of the following cannot be classified as qualifying asset?
(1) Investment property not yet ready for its intended purpose measured under fair value
model.
(2) Building under construction to be used as office building in the future.
(3) Consumable plant related to agricultural activities not yet ready for harvest.
(4) Building under construction to be leased out under operating lease in the future
measured under cost model.
A. 1 and 2 C. 1 and 3
B. 2 and 3 D. 2 and 4
2. Determine whether the following statements are true or false:

I. Capitalization of borrowing always commences when interest cost in relation to the
borrowing is incurred.
II. Borrowing costs related to non-qualifying assets are not capitalized but presented
within statement of profit or loss.
III. If the asset is financed by specific borrowing but a portion is used for working capital
purposes, the borrowing shall be treated as a general borrowing in determining capitalizable
borrowing cost.
A. B. C. D.
Statement I False True False True
Statement II True True True True
Statement III True True False False
3. During the current year, KGA has constructed a building. In relation to this, the following
activities are under consideration:
January 31 Finalize the blue print of the building and technical site planning
March 21 KGA borrowed from a bank to finance the construction of its own
building
April 15 Bought the construction materials
May 30 Started the construction
The entity can commence the capitalization of borrowing cost from what date?
A. March 21 C. May 30
B. April 15 D. None from the choices
4. Determine the incorrect statement regarding capitalization of borrowing costs under PAS 23?
A. PAS 23 provides that if the asset is financed by specific borrowing, the capitalizable borrowing
cost is equal to the average expenditures of the asset during the period multiplied by a
capitalization rate.
B. The term borrowing costs which is capitalize under PAS 34 may include interest expense
computed using effective interest method.
C. Interest revenue earned on specific borrowing for qualifying asset reduces the cost of the
qualifying asset.
D. None from the statements.
5. All of the following is a required disclosure under PAS 23, except:

I. The capitalized borrowing cost
II. Segregation of qualifying assets from other assets
III. The weighted average expenditures, in relation to general borrowing
A. I and II
B. II and III
C. I and III
D. Il only
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BORROWING COSTS

MULTIPLE CHOICE (THEORIES)

2. Determine whether the following statements are true or false:

5. All of the following is a required disclosure under PAS 23, except:

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