GREAT ZIMBABWE UNIVERSITY

MUNHUMUTAPA SCHOOL OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

ACCOUNTING LEVEL 4.1

NAMES OF GROUP MEMBERS:

VICTOR MBIZVO M203584

PRECIOUS SUWEDI M204733

LEON TAPFUMANEYI M204423

MODULE: FINANCIAL REPORTING

YEAR: 2023

QUESTION (3)
From the following independent events consider and determine costs to be capitalised or
treated as borrowing costs to be charged to profit or loss were appropriate:

a) An entity borrows $5 million to fund the construction of a new building. Interest

is payable on the loan at 8%. Stage payments were due throughout the
construction period and therefore excess funds were reinvested during that period.
By the end of the project, investment income of $150,000 had been earned and the
construction took twelve months to complete. (5 marks)
ANSWER
Loan interest
8% x $5 000 000
=$400 000
Investment income
= $150 000
Amount to be capitalised
= $400 000 - $150 000
=$250 000

Notes

To determine the costs to be capitalized or treated as borrowing costs, we need to consider

the specific criteria provided. Based on the information provided, we can break down the
costs as follows:
1. Borrowing Costs (Interest on the loan):
The interest payable on the loan at 8% is a borrowing cost that should be capitalized
as part of the cost of the new building.
2. Stage Payments:
The stage payments made throughout the construction period are not explicitly
mentioned to be financing costs. However, if these stage payments include interest or
financing charges, those should be treated as borrowing costs and capitalized along
with the interest on the loan.
3. Excess Funds and Investment Income:
Since the investment income of $150,000 was earned during the construction period,
it should be deducted from the total borrowing costs to be capitalised

b) An entity already has a number of general loan arrangements:

Loan 1 of $800 000, interest paid at 9%
Loan 2 of $2,000 000, interest paid at 8%
Loan 3 of $400 000, interest paid at 7.5%
 The entity has commissioned a new printing press to be constructed on its
behalf. The total cost will be $800,000 and the entity will be able to fund the
purchase from its existing borrowings since it has arranged for stage payments to
be made. The construction takes six months. (6 marks)

Answer
Interest on loan 1
9% x $800 000 = $72 000
Interest on loan 2
8% x 2 000 000 = $160 000
Interest on Loan 3
7.5% x $400 000 = $30 000
Total interest from General loan arrangements
=$72000 + $160 000 + $30 000
=$262 000
Amount to be capitalised:
=cost of Asset divided by total Total Funds Borrowed x total borrowing costs x
Project Duration
$800 000/$3 200 000 x $262 000 x 6/12
= $32 750
Amount to be charged to the Profit or Loss
=$65500 - $32 750
=$32750

c) Describe borrowing costs and how they should be treated in financial reports
according to IFRSs (5 marks)

1. Capitalization of Borrowing Costs:

If borrowing costs are directly attributable to the acquisition, construction, or
production of a qualifying asset, they should be capitalized as part of the cost of that
asset. The capitalization of borrowing costs commences when all the following
conditions are met:
a. Expenditures for the asset have been incurred.
b. Borrowing costs have been incurred.
c. Activities that are necessary to prepare the asset for its intended use or sale are in
progress.

2. Determining the Amount to Capitalize:

The amount of borrowing costs to be capitalized should be determined using the
weighted average of the borrowing costs applicable to the entity's borrowings
outstanding during the period. However, if the entity has specific borrowings that are
directly attributable to the acquisition, construction, or production of the qualifying
 asset, the actual borrowing costs incurred on those specific borrowings should be
capitalized.

3. Treatment of Other Borrowing Costs:

Borrowing costs that do not meet the criteria for capitalization should be recognized
as an expense in the period in which they are incurred. These costs should be charged
to profit or loss.