Chapter 09

Accounting for Borrowing Costs

Answers for Tutorial Questions

Question 01
1,200,000 x 10% 120,000
800,000 x 9.5% 76,000
196,000

Capitalization Rate for 196,000/2,000,000 x 100

general borrowings 9.8%

Borrowing cost to be capitalized for the Y/E 31.12.2017

Machinery for hydroelectric plant

300,000*9.8% 29,400
200,000*9.8%*(3/12) 4,900

Mining equipment
1,500,000*11%*(6/12) 82,500
116,80
Total borrowing cost to be capitalized 0
Question 02
Analysis of expenditure
Expenditure Amount Weighted for period
(Rs. ‘000) allocated to outstanding
general (Rs.’000)
borrowings
(Rs.’000)
1 July 2016 200 0 0
30 September 2016 600 100* 100 x 9/12
31 March 2017 1,200 1,200 1,200 x 3/12
30 June 2017 200 200 200 x 0/12
Total 2,200 375

*Specific borrowings of Rs. 700,000 are fully utilized; remainder of expenditure is therefore
allocated to general borrowings.

The capitalization rate relating to general borrowings is the weighted average of the
borrowing costs applicable to the entity’s borrowings that are outstanding during the period,
other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Weighted average borrowing cost: 12.5% (1,000/2,500) + 10% (1,500/2,500) = 11%

Borrowing cost to be capitalized

Specific loan 65,000
General borrowings (Rs. 375,000 × 11%) 41,250
Total 116,250
(Less) interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250

Therefore, the borrowing costs to be capitalized are Rs. 86,250.

Question 03

1)

Total interest
Capitalization Rate=
Weighted Average Loan

Loans Outstanding @ 1 Weighted Rate Finance cost

April 2017 to 31 Average
March 2018 Loan
Loan 1 5,000,000 x (6/12) 2,500,000 8% 200,000
Loan 2 2,000,000 2,000,000 6% 120,000
Loan 3 1,000,000 1,000,000 9% 90,000
5,500,000 410,000

410,000
Capitalization Rate= =7.45 %
5,500,000

Loans Outstanding @ 1 Weighted Rate Finance cost

October 2017 to 31 Average
March 2018 Loan
Loan 2 2,000,000 x (6/12) 1,000,000 6% 60,000
Loan 3 1,000,000 x (6/12) 500,000 9% 45,000
1,500,000 105,000

105,000
Capitalization Rate= =7 %
1,500,000

Note: Several capitalization rates will be required when there is a change in outstanding loan
balances during the year.

2)

Borrowing cost eligible for capitalization (Rs.)

2,000,000*7.45% 149,000
3.000,000* 7%*6/12 105,000
254,000

3)
Income statement for the year ended 31 March 2018 (Rs.)
Finance cost (410,000-254,000) (156,000)

Statement of financial position as at 31 March 2018

Property, plant and equipment in progress (cost 5,254,000
incurred +finance cost element) (5,000,000+254,000)

Non-current liabilities
6% Loan 2 2,000,000
9% Loan 3 1,000,000