\ ~ Total cost of plant nA CHAPTER 54 BORROWING COST Problem 54-1 (IFRS) On January 1, 2017, Hamlet Company borrowed P6,000,000 a annual interest rate of 10% to finance specifically the cost of build an electricity generating plant. Construction commenced On January | 2017 with a cost P6,000,000. 1 Notall the cash borrowed was used immediately, so interest income of 80,000 was generated by temporarily investing some of the borrowe} funds priorto use. The project was completed on November 30,2017, What is the carrying amount of the plant on November 30, 20177 a. 6,000,000 t& 6,470,000 c. 6,520,000 d. 6,550,000 Solution 54-1 Answer b Construction cost . 6,000,000 Interest (6,000,000 x 10% x 11/12) 950,000 Interest income (_80,000) To co PAS 23, paragraph 32, provides that if the funds are borowe! specifically for the purpose of acquiring a qualifying asset, theamout of capitalizable borrowing cost is the actual borrowing cost incwrel during the period Jess any investment income from the tempo investment of those borrowings. 666problem 54-2 (AICPA Adapted) w Sun ctallonThe ~ conan tn asset that qualified fr intrest searand was completed theses lon beginning of the current The egastruction cost ta P12, during the The entity re og nates ggasi compriing P00 th Fee ts ast eens rTowings were specified forthe censor of . What amount of interest should be capitalized? a. 480,000 be 516,000 c. 810,000 d. 960,000 2. ‘What is the interest expense for the current year? a. 960, ea tae b. € Sat 000 d, 0 000, 3000 and was incurred evenly Solution 54-2 Question I Answer b If the construction is financed by general borrowing, the average interest rate is multiplied -by average expenditures in com, yuting capitalizable borrowing cost. e . Principal Interest 8% note payable (8% x 6,000,000) 6,000,000 480,000 9% note payable (9% x 9,000,000) 9,000,000 810,000 Total 15,000,000 1,290,000 Average interest rate (1,290,000 / 15,000,000) 8.60% Average expenditures (12,000,000 /2) 6,000,000 Capitalizable interest (6,000,000 x 8.6%) 516,000 Question 2. Answer Total interest incurred 1.290,000 Capitalizable interest 516,000) Interest expense for the year 774,900 667Problem 4-3 (AICPA Adapted) Clay Compan: started construction of anew office buildi on Jani T SDL? apd moved into the finished building on July 1, 2018. Ofte P25-090.000 total cost, P20,000,000 was incurred in 2017 evenly throughout the The incremental borrowing rate was 12% Terouthout 2013, and the total amount of interest incurred was P1,020,000. What amount should be reported as capitalized interest on December 31, 20177 a 1,020,000 b. 1,200,000 ©. 1,500,000 d. 2'400,000 Solution 54-3 Answer a Incomputin; ig the average expenditures, the amount: of P20,000,000 is simply divided by 2 or P10,000,000. because the expenditures are incurred evenly during 2017. The interest on average expenditures is P10,000,000 multiplied by 12% or P1,200,000. italizable “ing cost is limited to the actual borrowing cost incurred of P 1,020,000 because this is]ower than the computed amount of P1,200,000. Problem 54-4 (IFRS) On January 1, 2017, Cagayan Company took out a loan of 124,000,000 in order to finance specifically the renovation of a buildi ‘The renovation work started on the same date. The loan carried annual interest at 10%. Work on the building was substantially complete on October 31, 2017. Detober sl, 20! ‘The loan was repaid on December 31,2017 and P200,000 investment income was eamed in the period to October 31 on the proceeds of the loanrot yet used for the renovation. What amount of capitalizable borrowing cost should be included in the cost of the building? a. 2,400,000 b. 2°200,000 c, 200,000 & 1,800,000 Solution 54-4 Answer d Interest incurred (24,000,000 x 10% x 10/12) 2,000,000 Interest income 200,000 Capitalizable borrowing cost 1,800,000 ee 668re- "CoC Problem 54-5 (AICPA Adapted) Marian ee P20,000,000 at 10% partly for general and to finane C4 i purposes “the construction of a building on January 1, 2017. The loan shall be repaid cx cing the followi do aioe mmencing the month following Expenditures incurred evenly during the year for the completed building totaled P12,000,000 on December 31,2017, The entity earned interest of 200,000 for the year on the unexpended Portion of the loan. What amount of interest is capitalized on December 31,2017? a. 1,200,000 b, 1,000,000 e& — 600,000 d. 400,000 Solution 54-5 Answer c The average expenditures amount to P12,000,000 divided by 2 or 6,000,000. The interest is P6,000,000 times 10% or P600,000. ‘The investment income of P200,000 is ignored because the construction is financed by general borrowing. : Problem 54-6 (IAA) Moses Company borrowed P4,000,000 én.a 10% note payable to finance a new warehouse which the entity is constructing for own use. The only other debt ofthe ety isa P6,000,000, 12% mortgage payable onan office building. At the end of the curent year, everage accumulated expenditures on the new warehouse totaled P4,750,000. What amount should be capitalized as interest for the current year? a. 400,000 . b. 475,000 © 490,000 4. 522,500 Solution 54-6 Answer ¢ Specific borrowing (4,000,000 x 10%) 490,000 General borrowing (__750,000x 12%) 90,000 Capitatizable interest 490,000 Average expenditures applicable to general borrowing (4,750,000 less 4,000,000 specific) 750,000 669Problem 54-7 (LAA) The third year of a construction project of Jilliane Company began with a P3,000,000 balance in construction in progress. Included in that figure is P600,000 of interest capitalized in the firs two years. Construction expenditures during the third year were P8,000,009 which were incurred evenly throughout the entire year. The entity had P30,000,000 in interest-bearing debt outstanding in the third year at an interest rate of 9% 1. What amount of interest for the third year is capitalized? a, 360,000 be 630,000 c. 936,000 d. 990,000 2. What amount should be reported as interest expense for the third year? a. 2,700,000 be 2,070,000 c. 1,980,000 d. 1,350,000 Solution 54-7 Quesstion 1 Answer b Construction in progress ~ beginning of third year 33,000,000 Average expenditures during the third year (8,000,000/2) 4,000,000 Total 7,000,000 Capitalizable interest (9% x 7,000,090) 630,000 Question 2 Answer b Interest incurred in the third year (9% x 30,000,000) 2,700,000 Capitalizable interest (630,000) Interest expense for third year 2,070,000 2s 670problem §4-8 (IAA) Jam Company started construction on a buildin, at inning current year and completed construction at petites ote The entity had only two interest notes outstandi durii luring the both of these notes were outstanding for all 12 feos weber The following information is available: Average accumulated expenditures Ending balance in construction in progress before’ capitalization of interest 3,600,000 6% note incurred specifically for the project 1,500,000 9% long-term note 5,000,000 What is the cost of the building? az 3,780,000 b. 2,680,000 ¢., 3,750,000 d. 3,825,000 Solution 54-8: Answer a Average expenditures 2,500,000 Specific borrowing (1,500,000) General borrowing 1,000,000 Construction in progress ~ actual expenditures -3,600,000 Capitalizable interest: ‘ Specific borrowing (6% x 1,500,000) 90,000 General borrowing (9% x 1,000,000) 90,000 Total cost of building 3,780,000 671Problem 54-9 (IAA) ‘ ‘onstructed asset costing P5,000, During 2017, Joshua Company c' totaled P3,000,000. on, The weighted average expenditures ‘To help pay for construction, P2,200,000 was borrowed at 10% on, January 1, 2017, Funds not needed for construct short-term securities yielding Pa Other than the construction funds outstanding during the year was @ spayable dated January 1, 2016. 1. What amount of interest should be capitalized during 2017? a. 300,000 b. 150,000 or 247,000 4. 472,000 2. What amount should be reported as interest expense for 2017? a. 225,000 b._ 178,000 < 153,000 d. 0 Solution 54-9 Question 1 Answer ¢ ion were temporarily invested jp 5,000 in interest revenue, borrowed, the only other deby 2,500,000. 10-year, 9% note Specificborrowing (2,200,000 x 10%) 220,000 Interest revenue ( 45,000) General borrowing (800,000 x 9%) 72,000 ‘Capitalizable interest, 247,000 ‘Average expenditures 3,000,000 Specific borrowing (2,200,000) Geieral borrowing 800,000 Question 2. Answer c Interest on borrowing (9% x 2,500,000) 225,000 Captaaable incre on genealorowing (2,000) Interest expense for 2017 53,000 672problem 54-10 (AICPA Adapteg) ring 2017, Elysee Comp pp30,000,000. OMPany constructed a new facility ata cost The expenditures for the ty were incurred evenly ducing thee which Was finished late in 2017, e entity had the fi 1H enti € following loans outstanding on December + 10%note 10 finance spec . Ly th Investments were i income of P| 00,000 44° onthe roceeds from this loan and a Le ootsanoonds issued at face amount on April 30, 2016, + 8% 5-year note payable, dated March 1, 2016, P10,000,000. ‘What amount of interest is capitalized as cost of the new building? a. 1,550,000 ve 1,450,000 c. 1,400, d. 1,500,000 Solution 54-10 Answer b Average expenditures (30,000,000/2) 15,000,000 Applicable to specific borrowing (10,000,000) Applicable to general borrowing 5,000,000 Principal Interest. 12% 20-year bonds payable 30,000,000 3,600,000 8% 5-year note payable 10,000,000 _ 800,000 Total general borrowing __ Average capitalization rate (4,400,000/40,000,000) 1% _ Interest on specific borrowing (10% x 10,000,000) 1,000,000 Interest income related (o specific borrowing (190,000) - Interest on genera! borrowing (11% x _ 5,000,000) 550,000 _ Total captalizable interest 673V Problem 54-11 (IAA) During 2017, Israel Company constructed asset costing P4,2), 5,000, ‘The weighted average expenditures during the year amounteg ,, 3,900,000. ‘The entity borrowed P2,000,000 at 7.5% on January 1, 2017, Funds not needed for construction were temporarily invested in short-term, securities and eamed P59,000 in interest revenue, In addition to the construction loan, the entity had two other notes outstanding during the year, a P1,500,000, 10-year, 10% note payable dated October 1, 2016, and a P1,000,000, 8% 5-year note payable dated November 1, 2016. What amount of interest should be capitalized during 2017? a. 324,800 b. 297,500 c. 273,000 de 265,800 Solution 54-1] Answer d Specific borrowing (2,000,000 x 7.5%) 150,000 Interest revenue related to specific borrowing (59,000) General borrowing (1,900,000x 9.2%) 174,800 Capitalizable interest 265,800 Average expenditures 3,900,000 Specific borrowing \ (2,000,000) General borrowing 1,900,000 Principal —_ Interest 10-year 10% note payable 1,500,000 150,000 5-year 8% note payable 1,000,000 80,000 Total general borrowing 2,500,000 230,000 2% Average interest rate (230,000 / 2,500,000) 674problem 54-12 (IFRS) go pany commenced construction > 1 17. The cost ofP 18,000,000 was paid in fal Lee 12017 and we a = ‘The construction was completed on, September 30, 2017. ‘The borrowings during 2017 comprised the following: Bank A ~ 6% Bank B — 6.6% iWon p00 Bank C~ 7% 34,000,000 ne mouafbarowingcostshouldbecapiaize ination the a. 1,215,000 x 810,000 c. 911,250 a. 0 Solution 54-12 Answer b Annual interest Bank A ( 6% x 8,000,000) 480,000 Bank B (6.6% x 10,000,000) 660,000 - Bank C ( 7% x 30,000,000) 2,100,000 Total 3,240,000 Average interest rate (3,240,000/48,000,000 6.15% Capitalizable borrowing cost (18,000,000 x 6.75% x 8/12) 810,000 The construction petiod is 8 months from February 1, 2017 to September 30, 2017. Total annual interest 3240.00 Capitalizable borrowing cost (810,000) Interest expense for 2017 2,430,000 675Problem 54-13 (IFRS) ional entity, dec Ultimate Company, a socially responsible nultinationa to construct atunvel that wl link two sides of the village that were separated by a natural disaster years ago. Realizing its role as a goog corporate citizen, the entity has been.in this village a.couple of years exploring oiland gas in the nearby offshore area. The tunnel would take two years to build and the total capital outlay needed for the construction fouldnot be less than P20,000,000. To allow itselfamargin of safety, the entity borrowed P25,000,000 from three sources and used the extra P5,000,000 for working capital purposes. Financing was arranged as follows: Bank term Joan =% 5,000,000 Institutional borrowing ~ 8% 10,000,000 Corporate bonds. = — 9% 10,000,000 Inthe first phase of the construction of the tunnel, there were idle funds of P10,000,000 which the entity invested for a period of six months." Income from the investment was P500,000. ‘What amount of borrowing cost should be capitalized as cost of the asset upon completion? a. 4,100,000 be 3,280,000 ©. 3,200,000 d. 2;780,000 Solution 54-13 Answer b Annual interest 7%x 5,000,000 350,000 8%x 10,000,000 , 800,000 9%x 10,000,000 900,000 Total 2,050,000 Average interest rate (2,050,000/25,000,000) 8.2% Capitalizable borrowing costs (20,000,000 x 8.2% x 2 years) 3,280,000 ‘The investment income of P500,000 is ignored because the construction is financed by general borrowings. 676cific construction loan january 1 july 1 jovember | itis the cost of the new building? . 6,000,000 6,280,000 6,300,000 | 6,250,000 lution 54-14 Answer b (b) (a) Fractional Expenditure — Months january 1 1,000,000 122 July 1 2,000,000 6/12 lovember I 3,000,000 22 6,000,000 Werage expenditures plicable to specific foan pplicable to general loen Capitalizable interest: Specific (1,000,000 x 10%) General (1,500,000 x 12%) Total cost of new building 677 expenditures (1,000,000 + 2,000,000 + 3,000,000) jothead Company had the following loans outstanding for 2017. W% 12% ‘The entity began the self-construction of bui the building was completed on December air wuary 1, 2017 ie following expenditures were made during the year 1,000,000 2,000,000 3,000,000 (axb) Amount 1,000,000 1,000,000 500,000 2,500,000 2,500,000 ) 1,500,000 6,000,000 100,009 180,000 6,280,000Problem $4-15 (IAA) Warhead Company had loans outstanding during 2017 and 215, Specific construction loan 2,000,000 10% General loan 15,000,000 1% The entity began the self-construotion of a new building on January 1, 2017 and the building was completed on December 31, 2018. Expenditures during 2017 and 2018 were: 2,000,000 January 1,2017 July 1,2017 4,000,000 November 1, 2017 3,000,006 July 1,2018 1,000,000 1. Whatis the cost of the new building on December 31, 2017? a. 9,000,000 be 9,500,000 c. 9,200,000 d. 9,300,000 What is the cost of the new building on December 31, 2018? a. 10,000,000 bf 11,660,000 c. 11,700,000 d. 11,500,000 3. Whats the interest expense for 2018? a. 3,000,000 b. 2,040,000 c. 1,840,000 d. 0 678solution 54-15 Question 1 Answer b ( Fractional (ax b) id months Amount January 1,20 172 2,000,000 aT 1,2017 2,000,000 Nevember 1, 2017 un °$00;000 4,500,000 ¢ expenditures in 2017 500, Applisablefo specific loan ( 2000'000) Applicable to general loan Actual expenditures in'2017 Capital interest in 2017: Specific (3,900,000 x 10% jeneral 2°500°000 x 1296) Total cost of new building - December 31, 2017 _ 9,500,000 Question 2 Answer b Fractional Expenditure months © Amount wary 1, 2018 9,500,000 1/2 9,500,000 : 1;2018 100/000 6/12 '500,000 : 10,500,000 10,000,000 23, paragraph 18, provides that the average expenditures during _Aperiod shalll include the borrowing costs previously capitalized. _ Average expenditures in 2018 10,000,000 _ Applicable to specific loan (2,000,009) "Applicable to general loan 8,000,000 ‘umulative actual expenditures (9,500,000 + 1,000,000) 10,500,000 ‘Capitalizable interest in 2018 Specific 2,000,000 x 1o 200,000 General ¢#000:000 x 12%) 960,000 Total cost of new building — December 31, 2018 11,660,000 ‘sion 3 Answer b terest on general loan (12% x 25,000,000) 3,000,000 Capitalizabfe interest on general foan (960,000) Interest expense for 2018 2080100 679