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AA Presentation
AA Presentation
SCHOOL OF BUSINESS
ADVANCED ACCOUNTING 2
GROUP 3 MEMBERS
Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds. The accounting treatment of
borrowing costs depends on whether they are directly attributable to
the acquisition, construction or production of a qualifying asset.
Example 1: On 1st May 2021, DEF took a loan of kes 1 000 000 from a
bank at the annual interest rate of 5%. The purpose of this loan was to
finance a construction of a production hall.
The construction started on 1 June 2021. DEF temporarily invested Kes
800 000 borrowed money during the months of June and July 2021 at the
rate of 2% p.a.
What borrowing cost can be capitalized in 2021? (Assume all interest
was paid).
Solution:
Interest expense: kes 1 000 000 x 5% x 7/12 = Kes 29 167
Note: this is very simplified calculation and if the loan is repayable in
installments, then you need to take the real interest incurred (by the
effective interest method).
Less investment income: Kes 800 000 x 2% x 2/12 = Kes 2 667
Total borrowing cost to capitalize in 2021: Kes 26 500
EXPENSE RECOGNITION
Borrowing costs that do not qualify for capitalization are recognized as
an expense in the period in which they are incurred. For example, if a
company borrows money for general working capital purposes rather
than for a specific project, the interest incurred on this borrowing would
be expensed in the period it is incurred.
MEASUREMENTS
Capitalized borrowing costs are added to the cost of the asset and are
subject to depreciation, amortization or impairment, depending on the
nature of the asset. Borrowing costs recognized as an expense are
typically included in the income statement under finance costs or
interest expense.
DISCLOSURE
Borrowing costs, whether capitalized or expensed, should be disclosed in
the financial statements. This includes the accounting policy for
borrowing costs, the amount capitalized during the period, the
capitalization rate used, and any amounts expensed.
2. Accounting treatment of borrowing costs with examples or illustrations
Example 2: Scenario: You are a small business owner and decide to take out a
loan of $100,000 to purchase new equipment for your bakery. The loan has an
interest rate of 8% per year.
Simple Interest Expense: This is the most straightforward way. You would
simply calculate the annual interest payment as follows:
= $100,000 x 8%
= $8,000
In this case, the borrowing cost for the year would be $8,000. This expense
would be recognized on your income statement and reduce your profit for the
year.
= $100,000*8 %*(6/12)
= $4,000
3. Biblical Teaching on borrowing with Bible verses
Psalm 37:21 ( the wicked borrow and do not repay but the
righteous give generously)
- This verse contrasts the behavior of the wicked, who borrow
without repaying. In accounting, ethical behavior includes
honoring financial commitments, such as repaying borrowed
funds and associated borrowing costs, demonstrating integrity
and accountability in financial management.