MODULE # 18

PRACTICAL ACCOUNTING 1 – REVIEW

BORROWING COST
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. During 2020, Elijah Company constructed a new building at a cost of P30,000,000. The
expenditures for the building which was finished late in 2020 were incurred evenly during the
year.

The entity had the following loans outstanding on December 31, 2020:

· 10% note to finance specifically the construction, dated January 1, 2020, P10,000,000.
The note is unpaid on December 31, 2020.

· Investments were made on the proceeds from the loan and income of P100,000 was
realized in 2020.

· 12% 10-year bonds issued at face value on April 30, 2019, P30,000,000.

· 8% 5-year note payable, dated March 1, 2019, P10,000,000.

What is the capitalized borrowing cost?

a. 1,550,000
b. 1,450,000
c. 1,400,000
d. 1,500,000
2. On January 1, 2020, Carcass Company took out a loan of P24,000,000 in order to
finance specifically the renovation of a building. The renovating work started on the
same date. The loan carried annual interest rate at 10%. Work on the building was
substantially complete on October 31, 2020. The loan was repaid on December 1, 2020
and P200,000 investment income was earned in the period to October 31,2020 on the
proceeds of the loan not yet used for the renovation.

What is the amount of capitalizable borrowing cost?

a. 2,400,000
b. 2,200,000
c. 2,000,000
d. 1,800,000

3. Kyra Company had loans outstanding during 2020 and 2021.

Specific construction loan 2,500,000 8%
General loan 12,000,000 10%
The entity began the self-construction of a new building on January 1, 2020 and the
building was completed on December 31, 2021. Expenditures during 2020 and 2021
were:
January 1, 2020 3,000,000
July 1, 2020 1,500,000
November 1, 2020 3,000,000
July 1, 2021 2,000,000

What is the cost of the new building on December 31, 2020?

a. 8,125,000
b. 7,500,000
c. 7,875,000
d. 7,675,000
e. 10,712,500

What is the cost of the new building on December 31, 2021?

 a. 8,125,000
b. 7,500,000
c. 7,875,000
d. 7,675,000
e. 10,712,500

4. Wheeler Corporation constructed a building at a cost of 20,000,000. Average accumulated

expenditures were 8,000,000, actual interest was 1,200,000, and avoidable interest was
600,000. If the salvage value is 1,600,000, and the useful life is 40 years, depreciation expense
for the first full year using the straight-line method is
a. 475,000.
b. 490,000.
c. 515,000.
d. 675,000.

5. The Calvin Company self-constructed an asset for its own use. Construction started on January 1, 2021
and the asset was completed on December 31, 2021. Costs incurred during the year were as follows:
January 1- P400, 000; April 1- P500,000; August 1 - P480,000; December 1- P180,000

(1) What is the average accumulated expenditures for the self-constructed asset?
a. P1, 560,000
b. P 990,000
c. P 870,000
d. P 780,000

(2) If the company had a two-year, 18% loan of P500,000, specifically obtained finance the asset
construction, what is the capitalized interest added to the of the self-constructed asset?
a. P 90,000
b. P140, 000
c. P178.200
d. P280, 800
(3) Assuming that in addition to the specific borrowing, prior to the construction, the company had a
general borrowing amounting to P600,000 with interest of 20% and a two-year term that was used in
part In the self-construction, what is the total cost of the self-constructed asset?
a. P1, 770,000
b. P1, 748,000
c. P2, 650,000
d. P1.560, 000

(4) Assuming that the total construction costs of P1, 560000 were incurred evenly during the
construction period, and the company has the following outstanding obligations prior to the start of the
construction:
Specific borrowing P700.000, 16%. Due January 1, 2023 General borrowing P500.000. 18%, due January},
2022
What is the total capitalized interest?
a. P126, 400
b. P130, 000
c. P112, 000
d. P218, 000