7 Borrowing Costs 231

$ million

I January 2012. . . . . . . . 200

I July 2012..... . .. ... 600

Interest on the loan was fixed at 10% per annum. Unutilised funds were temporarily
invested with a return of 6% per annum.

Required:
Assuming XYZ adopts the "to the extent" approach of asset expenditure commencement,
determine the borrowing costs eligible for capitalisation for the year ended 31 December
2012 and consequently the cost of the property at 31 December 2012. Prepare the
journal entry to account for the borrowing costs.

I Case Studies

Case Prime View Properties (Holdings) Limited (PVL) is a company incorporated in Hong
Study 7.1 Kong. PVL holds a portfolio of commercial buildings for rental income. It is PVL's
accounting policy to use the cost model to account for property, plant and equipment
and the valuation model to account for investment properties.
The company's Atlantic Centre, a 30-storey commercial building located in Wanchai
(a traditional business district), was identified as a potential candidate for conversion
into a hotel. In the last few years, major tenants have moved out of the premises and
been replaced by smaller companies on shorter lease terms. This is mainly because a
few newer office tmvers have opened in the vicinity.
The Atlamic Ce,i'~'-~ (•:,·'.i• ·1i,;c, ,l shopping mall from ground level to the second
floor and ofk(·',, s",·:: n:: ·'. -. ·: i, / 1.0 the 29th floor. All the units have been leased
to parties n:-,\ ,,::.\ .ti:"j:. , ;. , . -: ..\,;c ~.\ 1ort-term leases, ranging from 1 year to 3 years.
Atlantic Cc,; ,·,.- Um, i• .' •. >,, :, \ _, '.' :i.J% owned subsidiary of PVL, was incorporated
in 1990 to hc rlw /.•',:;::,,: , .:, :.e, which had been purchased at $240 million. The
1; ,;

purchase was -vhu11y (:nan;.;d i.::,r internal capital, and ACL has always been a debt-
1

free company. Having regard to the Atlantic Centre's prime location, PVL considered
that converting the Atlantic Centre into a mid-range hotel would be the preferred
option.
On 1 April 2006, PVL would embark on an 18-month project which would
include upgrading the shopping mall from the ground level to the second floor of the
Atlantic Centre, rebranded as Atlantic Place, and making necessary alterations to the
offices from the third floor to the 29th floor to convert them into a five-star 350-room
mid-range hotel to be named the Atlantic Hotel.
Through professional surveyors, PVL obtained the following information on the
Atlantic Centre and the upcoming project: