Exercise (Chapter 3: MFRS 123 Borrowing Cost)

Question 1
BPN Bhd commenced the construction of an item of property, plant and equipment on 1st
mac 2020 and funded it with RM 10 million loan. The rate of interest on the borrowing was
5% per annum. Due to strike no construction took place between on 1st October 2020 and 1
November 2020.
You are required:
a) Calculate the amount of interest to be capitalised and interest expenses on 31st
December 2020.

Question 2
Binapuri Construction Bhd is an established property development in Melaka. In the middle
of the year 2010, the company obtained a project to construct 100 units of residential house
in Anjung Gapam. A 10% interest borrowing term loan of RM 450 million was arranged to
part finance the project. The term loan was fully drawn down on 1st November 2012 was
completed on 31st December 2015. From the period of 2012 to 2015, surplus fund from the
loan were invested in money market instruments.
The interest income as follows:

Period Investment Interest Income

RM’ million
1 Nov 2012 – 31st December 2012 20
1 Jan 2013 – 31st December 2013 450
1 Jan 2014 – 31st December 2014 200
1 Jan 2015 – 31st December 2015 50
Total Interest Income 720

The interest cost on the loan were as follows:

Period Loan Interest Charged

RM’ million
1 Nov 2012 – 31st December 2012 5,000
1 Jan 2013 – 31st December 2013 13,000
1 Jan 2014 – 31st December 2014 12,000
1 Jan 2015 – 31st December 2015 15,000
Total Interest charged 45,000

You are required:

Calculate the amount of interest that should be capitalised each year.
Question 3
Unify Bhd get the contact to build a unifi smart cable that will ease wireless network in the
city. The cost of the project was estimated to be RM 950 million and is to be completed in 2
years. On 1st Jan 2020, the entity borrowed from various sources for the construction and
working capital as follows:

Sources Interest rate Amount (RM)’m

Corporate bonds 10% 300

Bank Loan 8% 400

Institutional borrowing 9% 300

Additional information:
During the year, Unify Bhd only utilized 80% of the allocated funds and invested the
remaining amount. The investment earned and income of RM 10 million
You are required:
a) Identify capitalization rate
b) The amount of interest can be capitalized on 31s December 2020
c) The amount of interest that can be charged as an expense on 31st December 2020.

Question 4
GJH Holding a property development company, has the following loans in place at the
beginning of the year 2020.

Sources Amount Rate of Interest

RM’ Million %
Loan Bank 50,000 10
Foreign currency loan 100,000 6
Total 150,000

Additional information:
1. On January 2020, GJH Holding began a project construct a condominium in Bandar
Baru Sendayan. For the year 2020, the project will utilize RM 120,000,000 from existing
borrowing.
2. Expenditure drawn down for the construction was as follows:
i. RM 70,000,000 on 1st Jan 2020
ii. RM 50,000,000 on 1st July 2020
You are required:
a) Calculate the borrowing costs to be capitalizing for project of the constructing
condominium in Bandar Baru Sendayan.

Question 5
On 1st January 2017, Senah Bhd raised finance amounting to RM 600,000. The borrowing
finance both a construction of a plant and for operations. On 31 Dec 2020, the outstanding
borrowings were RM 400,000 with no capital repayment in year 2020. The borrowings were
mainly used for the construction of the plant at a cost of RM 300,000. Senah Bhd wants to
capitalise borrowing costs on qualifying assets. The detail of the borrowing was as follows:
At the end of 31st December 2020:

Sources: RM
12% loan stock 100,000
10% term loan 220,000
8% redeemable preference shares 80,000

You are required:

Compute the capitalisation rate and the amount of interest that qualifies for capitalisation for
the year ended 31st December 2020.

Question 6
Salmah Bhd constructed a building on 1 Jan 2017. The building was completed on 31st
December 2019. Construction cost (excluding interest) incurred on the building was RM
1,500,000.
Salmah Bhd secured a loan of RM 1,000,000 from Sheila Finance Bhd to finance the
construction costs at 10% interest rate per annum. Repayment period of loan was 5 years.
Since Salmah Bhd did not need the full amount of the loan in the 1st 5 year of the
construction, it deposited RM 600,000 in fixed deposit which yielded an interest 8% per
annum. The deposit matured on 31st December 2017.
The company policy is to capitalised borrowing costs as part of the cost of assets. The useful
life of building was estimated to be 50 years.

You are required:

a) Calculate the cost of building
b) Show the income statement (extract) for the years ended 31 December 2017 until 31st
December 2020.

Question 7
On 1st May 2020, Mr Rizal took a loan of RM 1,000,000 from a bank at the annual interest
rate of 5%. The purpose of this loan was to finance a construction of a production hall. The
construction started on 1st June 2020. Mr Rizal temporarily invested RM 800,000 borrowed
money during the months of June 2020 and July 2020 at the rate of 2% per annum.
You are required:
a) Calculate the borrowing cost that can be capitalized by Mr Rizal.
b) Calculate interest expense on Statement of Profit and loss.

Question 8
On 1 January 2020 Pacific Bhd borrowed RM 1,500,000 to finance the production of two
assets, both of which were expected to take a year to build. Work started during 2020. The
loan facility was drawn down and incurred on 1 January 2020, and was utilised as follows,
with the remaining funds invested temporarily.

Asset A Asset B

1st Jan 2020 RM 250,000 1st Jan 2020 RM 500,000

1st July 2020 RM 250,000 1st July 2020 RM 500,000

Additional information:
1. The loan rate was 9%
2. Pacific Bhd can invest surplus funds at 7%.

You are required:

Calculate:
a) Total interest for Asset A and Asset B.
b) Total interest from investment for Asset A and Asset B.
c) Borrowing cost for each asset.
d) Total Asset A and Asset B at the end of 31st December 2020.

Question 9
Pop Bhd had the following loans in place at the beginning and end of 2020

Sources: 1st Jan 2020 31st December

2020
(RM)
(RM)
10% Bank loan repayable 2023 120,000,000 120,000,000

9.5% Bank loan repayable 2022 80,000,000 80,000,000

8.9% debenture repayable 2021 - 150,000,000

Additional Information:
1. The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of
mining equipment), construction of which began on 1 July 2020.
2. On 1 January 2020, Pop Bhd began construction of a qualifying asset, a piece of
machinery for a hydroelectric plant, using existing borrowings. Expenditure drawn down
for the construction was: RM30,000,000 m on 1 January 2020, and RM 20,000,000 on 1
October 2020

You are required

a) Calculate the borrowing costs that can be capitalised.
Question 10

Think Pad Construction Bhd has three sources of borrowing:

Sources Loan Interest Expenses

(RM)
(RM)
7 years loan 8,000,000 800,000
10 years loan 10,000,000 900,000
Bank overdraft 5,000,000 900,000

Additional Information:
1. The 7-year loan has been specifically raised to fund the building of a qualifying assets.
2. The company has incurred the following expenditure on a project funded from general
borrowings for the year 31st December 2020:

Date Incurred Amount

(RM)

31st March 2020 1,000,000

31st July 2020 1,200,000
30 October 2020 800,000

You are required

a) Determine the capitalization rate for general borrowing.
b) Calculate the borrowing costs that can be capitalised.
c) Calculate interest charged in statement of profit and loss