On January 1, 20x1, ABC Co.

obtained a 12%, P1,000,000 bank loan specifically to finance

the production of customized equipment. The construction was started immediately and
was completed on March 31, 20x2. Excess funds have been invested and have earned
investment income of P18,000 in 20x1. 

How much is borrowing cost eligible for capitalization in 20x1? 

How much is borrowing cost eligible for capitalization in 20x1?

Given:
Actual Borrowing Cost: 1,000,000 x 12%
Interest Income: 18,000
Computation:
= (1,000,000 x 12%) = 120,000 - 18,000 = 102,000
Borrowing cost eligible for capitalization 20x1 is 102,000
!!!!!
ABC Co. is constructing an office building for its own use. The following expenditures
relating to the construction of the office building were made during the 20x1:

Total construction expenditures:

January 1, 20x1 P 1,500,000

June 1, 20x1 600,000

November 30, 20x1 300,000

Outstanding general borrowings:

Bonds issued just prior to construction of building; interest rate, 10% for 10 years
P 3,000,000

Bank loan obtained prior to construction; interest rate 8% for 8 years

1,000,000
Estimated cost of equity capital
13%

Requirement: Determine the amount of interest to be capitalized 20x1.

Requirement: Determine the amount of interest to be capitalized 20x1.

Date Expenditures Month Average

Outstanding
(a) (c)=(a)x(b)
(b)
January 1, 20x1 1,500,000 12/12 1,500,000
June 1, 20x1 600,000 7/12 350,000
November 30,20x1 300,000 1/12 25,000
      1,875,000
 

The capitalization rate is computed as follows:

Capitalization rate = Total Interest Expense on General Borrowings

                                                      Total General Borrowings

Total Interest Expense on General Borrowings

(3,000,000 X 10%= 300,000) + (1,000,000 x 8%= 80,000)     =    380,000

Divide by: Total general borrowings (3,000,000 + 1,000,000) = 4,000,000

Capitalization rate = 380,000/4,000,000 = 9.5%

Average Expenditure                               1,875,000

Multiply by: Capitalization Rate                        9.5%

Borrowing Cost on General Borrowing 178,125