PROBLEM

Requirements:
1. Cost of the building as of 12/31/Y1
2. Cost of the building as of 12/31/Y2

Specific borrowing
Rate 10%
Principal 3,000,000
Actual interest - Y1 300,000 [3,000,000 x 10% x 12/12)
Actual interest - Y2 150,000 [3,000,000 x 10% x 6/12)

Gen borrowing
Rate 12%
Principal 25,000,000
Actual interest - Y1 3,000,000 [25,000,000 x 10% x 12/12)
Actual interest - Y2 1,500,000 [25,000,000 x 10% x 6/12)

Computations for Year 1:

 Construction
Date costs Fraction (months) Average Expenditures
Jan 1, Y1 4,000,000 12/12 4,000,000
Apr 1, Y1 5,000,000 9/12 3,750,000
Dec 1, Y1 3,000,000 1/12 250,000
Total expenditures 8,000,000
Less: Specific borrowing (principal) 3,000,000
Net average expenditures 5,000,000
x Capitalization arte 12%
General borroring cost 600,000
+ Specific borrowing cost 300,000
+ Construction costs:
Jan 1, Y1 4,000,000
Apr 1, Y1 5,000,000
Dec 1, Y1 3,000,000
Total cost of building 12/31/Y1 12,900,000

Computations for Year 2:

Construction
Date costs Fraction (months) Average Expenditures
Jan 1/ Y2 12,900,000 6/6 12,900,000
Mar 1, Y2 6,000,000 4/6 4,000,000
Total expenditures 16,900,000
Less: Specific borrowing (principal) 3,000,000
Net average expenditures 13,900,000
x Capitalization rate 12%
x Time period (6 months) 6/12
General borroring cost 834,000
+ Specific borrowing cost 150,000
+ Construction costs:
Beg balance 12,900,000
Cost incurred on 3/1/Y2 6,000,000
Total cost of building 12/31/Y2 19,884,000
*lower than the actual (P3 million)
*actual interest Y1

*beginning balance of Y2, as computed above

*lower than the actual (P1.5 million)

*actual interest Y2

*Cost as of 12/31/Y1