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Copy of SOL. MAN. Chapter 19 Borrowing Costs IA PART 1B

Intermediate accounting (Highland Community College (Kansas))

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Chapter 19

Borrowing Costs

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. FALSE

PROBLEM 2: THEORY & COMPUTATIONAL

1. B
2. A
3. C
4. D

5. Answer: (12% x 1,000,000) – 18,000 = 102,000

6. Solution:
The average expenditures are computed as follows:
Mos.
Date Expenditures Average
Outstanding
1/1/x1 1,500,000 12/12 1,500,000
6/1/x1 600,000 7/12 350,000
11/30/x1 300,000 1/12 25,000
Totals 2,400,000 1,875,000

The capitalization rate is computed as follows:

[(3M x 10%) + (1M x 8%)] ÷ (3M + 1M) = (300K + 80K) ÷ 4M = 9.5%

1,875,000 x 9.5% = 178,125

Actual = 380,000

Borrowing costs eligible for capitalization = 178,125 (the lower amount)

7. Solutions:

Requirement (a): Ave. accumulated expenditure method (Traditional)

The capitalization rate is computed as follows:
Total interest expense on general borrowings
(400K x 10%) + (900K x 8%) 112,000
Divide by: Total general borrowings (400K + 900K) 1,300,000

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Capitalization rate 8.62%

Fraction
of the Year Capitalized
Expenditure Date Amount Outstanding Interest
January 2, 2002 ₱500,000 12/12 ₱500,000
May 1, 2002 500,000 8/12 333,333
November 1, 2002 400,000 2/12 66,667
Total weighted average expenditures for 2002 ₱900,000

Specific Borrowing:
Interest expense on specific borrowing (800K x 12%) 96,000
Less: Investment income earned on specific borrowing ( - )
Borrowing cost from specific borrowing 96,000

General Borrowing:
Average expenditures 900,000
Less: Specific borrowing ( 800,000)
Expenditures financed by general borrowing 100,000
Multiply by capitalization rate 8.62%
Borrowing cost from general borrowing 8,620

Total 104,620

The total actual borrowing cost is ₱208,000 (96K + 112K see

The amount eligible for capitalization is ₱104,620 -
computation above).
the lower amount.

Requirement (b): Avoidable interest method (Contemporary)

The expenditures are allocated to the specific and general borrowings

and the amounts allocated to the general borrowings are averaged.
Expenditure Mos.
Date Specific General Average
s Outstanding
500,00
2-Jan-02 500,000
0 N/A
1-May- 300,00 200,00 133,33
500,000
02 0 0 N/A; 8/12 3
1-Nov- 400,00 66,66
400,000
02 0 2/12 7
800,00 700,00 200,00
Totals 1,400,000
0 0 0

Specific Borrowing:
Interest expense on specific borrowing (800K x 12%) 96,000
Less: Investment income earned on specific borrowing ( - )
Borrowing cost from specific borrowing 96,000
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General Borrowing:
Average expenditure 200,000
Multiply by: Capitalization rate (see req’mt. a) 8.62%
Borrowing cost from general borrowing 17,240

Total 113,240

The total actual borrowing cost is ₱208,000 (96K + 112K).

The amount eligible for capitalization is ₱113,240 - the lower
amount.

8. C

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PROBLEM 3: EXERCISES
1. Solution:
(1M x 5% x 7/12*) – (800,000 x 2% x 2/12) = 26,500

*Although the funds were withdrawn on 1st May, the capitalization can start
only on 1st June 20X1 when all criteria were met (the construction had not
started until 1st June).

2. Solution:
Capitalization rate = [(12% x 8.4M) + (8% x 1.8M)] ÷ (8.4M + 1.8M) =
(1,152,000 ÷ 10,200,000) = 11.29%

Capitalizable borrowing cost = (10% x 3.6M) + [(5.4M – 3.6M) x 11.29%] =

360,000 + 203,220 = 563,220

The interest capitalized is ₱563,220 (the lower of the avoidable interest of

₱563,220 and the actual interest cost incurred of ₱1,512,000 – see
computation above).

3. Solution:
The expenditures are allocated to specific and general borrowings. The
amounts allocated to general borrowings are averaged.
Expenditure Specifi Genera Mos. Averag
Date
s c l Outstanding e
200,00
7/1/06 200,000
0 N/A
500,00 100,00
9/30/06 600,000 75,000
0 0 N/A; 9/12
3/31/07 1,200,000 1,200,000 3/12 300,000
200,00
6/30/07 200,000
0 0/12 -
700,00 1,500,00
Totals 2,200,000
0 0 375,000

The capitalization rate for the general borrowings is computed as follows:

Total interest expense on general borrowings
(1M x 12.5%) + (1.5M x 10%) 275,000
Divide by: Total general borrowings (1M + 1.5M) 2,500,000
Capitalization rate 11%

Specific Borrowing:
Interest expense on specific borrowing (given) 65,000
Less: Investment income earned on specific borrowing ( 20,000)
Borrowing cost from specific borrowing 45,000

General Borrowing:
Average expenditures 375,000
Multiply by capitalization rate 11%

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Borrowing cost from general borrowing 41,250

Borrowing cost eligible for capitalization 86,250*

4. Solution:
The expenditures are allocated to specific and general borrowings. The
amounts allocated to general borrowings are averaged.
Expenditure Mos.
Date Specific General Average
s Outstanding
1/1/09 6,000,000 6,000,000 - N/A
3,000,00
8/1/09 3,000,000 - 5/12 1,250,000
0
12/31/0 1,000,00
1,000,000 - 0/12 -
9 0
6,000,00 4,000,00
Totals 10,000,000 1,250,000
0 0

Specific Borrowing:
Interest expense on specific borrowing (6M x 9%) 540,000
Less: Investment income earned on specific borrowing ( - )
Borrowing cost from specific borrowing 540,000

General Borrowing:
Average expenditure 1,250,000
Multiply by capitalization rate 11%
Borrowing cost from general borrowing 137,500
Borrowing cost eligible for capitalization 677,500

5. Solution:
The capitalization rate is computed as follows:
(130,000 x 8%) + (50,000 x 5.5%) ÷ (130,000 + 50,000) = (13,150 ÷
180,000) = 7.31%

The “Bank loan, 6% p.a.” is ignored because it is a specific borrowing

for another asset (i.e., “production hall” rather than “machinery”).

The weighted average expenditures is computed as follows:

(60,000 x 11/12) + (25,000 x 4/12) = 63,333

Borrowing cost = 7.31% x 63,333 = 4,630

The borrowing cost eligible for capitalization is 4,630 because it is

lower than the actual borrowing cost of 13,150 (see computation
above).

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PROBLEM 4: CLASSROOM ACTIVITY

Plus points to the learner who went the extra mile and
placed a description for the table.

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PROBLEM 5: MULTIPLE CHOICE - THEORY

1. A 6. D
2. A 7. B
3. C 8. A
4. D 9. C
5. B 10. A

PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL

1. B (50,000 + 20,000) = 70,000 is greater than the actual interest
incurred of 40,000. Therefore, 40,000, the lower amount, is
capitalized.

2. A (2,000,000 ÷ 2) = 1,000,000 average expenditures x 12% =

120,000;
The actual interest incurred of 102,000 is lower than the computed
interest. Therefore, 102,000 is capitalized.

3. C
Solution:
Interest costs incurred on warehouse constructed for Belardo's
own use 20,000
Special-order machine for sale to unrelated customer,
produced
according to customer's specifications 9,000
29,00
Capitalized interest
0

4. B (50K x 12/12) + (60K x 7/12) + (90K x 1/12) = 92,500

5. C (1,000,000 + 1,000,000 + 600,000) ÷ (8,000,000 + 12,000,000 +

4,000,000) = 10.833%

6. B (1,000,000 + 600,000) ÷ (12,000,000 + 4,000,000) = 10%

7. D (4M ÷ 2) = 2M x 12% = 240,000 vs. 204,000 actual; capitalizable

borrowing cost is 204,000, the lower amount

8. C (400,000 x 10%) + [(475,000 – 400,000) x 12%] = 49,000

9. B [(30,000 x 12/12) + (80,000 ÷ 2)] = 70,000 x 9% = 6,300

10. B (6% x 150,000) + [(250,000 – 150,000) x 9%] = (9,000 + 9,000) =

18,000

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