Illustration

An entity had the following borrowings on January 1 of the current year. The borrowings were
made for general purposes and the proceeds were partly used to finance the construction of a new
building.

Principal Borrowing Cost

10% bank loan 3,000,000 300,000
12% short – term note 1,500,000 180,000
8% long – term loan 3,500,000 280,000
8,000,000 760,000
The construction of the building was started on January 1 and was completed on December 31 of
the current year.

January 1 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
December 31 400,000
Total expenditures on the building 4,000,000

Average carrying amount of the building

(a) (b) (a x b)
Date Expenditures Months outstanding Amount
January 1 400,000 12 4,800,000
March 31 1,000,000 9 9,000,000
June 30 1,200,000 6 7,200,000
September 30 1,000,000 3 3,000,000
December 31 400,000 0 -------------
24,000,000
Average carrying amount (24,000,000/12) 2,000,000

Another approach
(a) (b) (a x b)
Date Expenditures Months outstanding Amount
January 1 400,000 12/12 400,000
March 31 1,000,000 9/12 750,000
June 30 1,200,000 6/12 600,000
September 30 1,000,000 3/12 250,000
December 31 400,000 - ------------
2,000,000
The capitalization rate is computed by dividing the total annual borrowing cost by the total
general borrowings.
Thus, P760,000 divided by P8,000,000 equals 9.5%
The amount of capitalizable borrowing cost is the average carrying amount of the building
multiplied by the capitalization rate
Thus, P2,000,000 x 9.5% equals P190,000.
The capitalizable borrowing cost shall not exceed the actual borrowing cost
The amount of P190,000 is the propler capitalizable borrowing cost because it is less than the
actual borrowing cost of P760,000.
The excess of P760,000 over P190,000 or P570,000 is charged to interest expense.

Asset financed both by specific and general borrowing

At the beginning of the current year, an entity borrowed P1,500,000 at an interest of 10%
specifically for the construction of a new building. The actual borrowing cost on this loan is
P150,000.
The entity had also outstanding during the year and 5-year 8% general borrowing of P7,000,000.
The construction of the building started on January 1 and was completed on December 31 of the
current year.

January 1 500,000
April 1 1,000,000
May 1 1,500,000
September 1 1,500,000
December 31 500,000
Total cost 5,000,000

(a) (b) (a x b)
Date Expenditures Months outstanding Amount
January 1 500,000 12/12 500,000
April 1 1,000,000 9/12 750,000
May 1 1,500,000 8/12 1,000,000
September 1 1,500,000 4/12 500,000
December 31 500,000 - -------------
2,750,000

Average expenditures 2,750,000

Specific borrowing (1,500,000)
Applicable to general borrowing 1,250,000
Capitalizable Interest
Specific borrowing (10% x 1,500,000) 150,000
General borrowing ( 8% x 1,250,000) 100,000
Total capitalizable interest 250,000