Further Practice Question 2

On 1 January 2022 Star Limited started construction of a building. The partial building was decided
to be rented out whereas some part is to be used for administrative function of the company. The
construction was completed on 31 August 2022. Details of the construction costs incurred are as
under:
Date Expenditure
1 Jan 22 180,000
1 Mar 22 240,000
1 Jul 22 280,000

The company utilized the following sources of finance:

1. Overdraft facilities available from two banks through out the construction period:

Bank A Bank B
Closing Balance (31 Dec 22) 2,000,000 3,000,000
Average Balance 800,000 1,200,000
Limit assigned by the bank 2,500,000 4,000,000
Interest expense for the year 128,000 216,000

2. Loan specifically obtained on 1 Feb 2022 amounted to Rs 350,000 at an interest rate

of 12%. The loan is repayable in full in 4 years.
3. Government grant of Rs 109,000 received on 1 August 2022 for the asset.
4. All surplus funds can be invested at 5% p.a.

Further information
After the completion of the 3 story building, 1 floor was kept for admin office activities and the
other two were rented out on 16 October 2022. Fair Value of the property at the date of renting
out was Rs 810,000 and on year end 31 December 2022 was Rs 877,500.

1. Useful life of the property is expected to be 8 years

2. Annual rent was received in advance Rs 250,000
3. Maintenance and other expenses paid upto the year end were Rs 45,000.
4. The company can sell all the floors individually as there is no legal bar on selling part of a property.
5. Grant is recognized as income and deferred grant is treated as liability.
6. PPE is carried at historic cost and IP is carried at fair value.

Required
Prepare extracts from Profit and loss statement
Prepare extracts of Statement of Financial position
Solution of Further Practice question 2

Weighted average rate of interest

Bank Loan Rate Cost

A 800,000 16.00% 128,000
B 1,200,000 18.00% 216,000
2,000,000 17.200% 344,000

Balance Schedule

Month Expend Balance

1 Jan 180,000 (180,000)
1 Feb 170,000 Specific Loan obtained
1 Mar 240,000 (70,000) Gen loan obtained
1 Apr (70,000)
1 May (70,000)
1 Jun (70,000)
1 Jul 280,000 (350,000)
1 Aug (241,000) Grant received Rs 109,000

Borrowing Cost eligible for capitalization

Specific

Loan Amnt Rate Time Interest

350,000 12% 7 Months 24,500 Feb - Aug

Income
170,000 5% 1 Month (708)
BC to be capitalized 23,792

General
Loan Amnt Rate Time Interest
180,000 17.20% 1 Month 2,580
70,000 17.20% 4 Months 4,013
350,000 17.20% 1 Month 5,017
241,000 17.20% 1 Month 3,454
15,064

Total Borrowing Cost capitalized 38,856

CWIP
Cost incurred 700,000 (180+240+280)
Borrowing cost capitalized 38,856
Cost of Property 738,856
PPE (1/3rd) 246,285
IP (2/3rd) 492,571

IP 492,571
PPE 246,285
CWIP 738,856

PPE
Cost 246,285
Depr for 4 months (10,262) 246,285/8 x (4/12)
CA of PPE 236,023

Investment Property
Cost 492,571
FV of 2 Floors at yr end 585,000 877,500/3*2
FV Gain (P/L) 92,429

The property (2/3rd) is Investment property from Day 1 because the property
was planned to be used as IP.

Interest Expensed Out

General Loan (Overdraft)

Total Interest on OD 344,000 128,000+216,000
Interest Capitalized (15,064) Above working
Interest expensed 328,936

Specific Loan
Loan Amount 350,000
Months 4 Months
Interest 14,000 350k x 12% x 4/12

Total Interest Expense 342,936 14k+331,516

Rental Income and Advanced Rent

Received 250,000
Months Earned 2.5 Months
Income 41,667 250k x 2/12
Unearned 208,333

Government Grants

Amount of Grant 109,000

Life of the asset 8 Years
Grant Income 4 Months 4,542
Deferred Grant Income 104,458
Statement of Financial Position

Non Current Assets

Property, Plant and Equipment 236,023
Investment Property 585,000

Non Current Liabilities

Deferred Grant Income 104,458
Bank Loan 350,000

Current Liabilities
Bank Overdraft 5,000,000 2 million + 3 million

Statement of Comprehensive Income

Incomes
Rental Income 41,667
FV Gain on Investment Property 92,429
Grant Income 4,542
138,638
Expenses
Depreciation expense - PPE (10,262)
Maintenance Expenses (45,000)
Interest Expenses (342,936)
(398,198)