Borrowing Cost - Problems PDF

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Borrowing Cost Problems On January 1, 2019, Hamlet Company borrowed P6,000,000 at an annual interest rate of 10% to finance specifically the cost of building an electricity generating plant. Construction commenced on January 1, 2019 with a cost P6,000,000. Not all the cash borrowed was used immediat...

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Borrowing Cost Problems 1. On January 1, 2019, Hamlet Company borrowed P6,000,000 at an annual interest rate of 10% to finance specifically the cost of building an electricity generating plant. Construction commenced on January 1, 2019 with a cost P6,000,000. Not all the cash borrowed was used immediately, so interest income of P80,000 was generated by temporarily investing some of the borrowed funds prior to use. The project was completed on November 30, 2019. What is the carrying amount of the plant on November 30, 2019? a. b. c. d.

6,000,000 6,470,000 6,520,000 6,550,000

Answer: B Solution: Construction cost Interest

6,000,000 (6,000,000 x 10% x 11/12)

550,000

Interest income

(

80,000)

Total cost of plant

6,470,000

2. On January 1, 2019, Cagayan Company took out a loan of P24,000,000 in order to finance specifically the renovation of a building. The renovation work started on the same date. The loan carried annual interest at 10%. Work on the building was substantially complete on October 31, 2019. The loan was repaid on December 31, 2019 and P200,000 investment income was earned in the period to October 31 on the proceeds of the loan not yet used for the renovation. 1. What amount of capitalizable borrowing cost should be included in the cost of the building? a. 2,400,000

b. 2,200,000 c. 2,000,000 d. 1,800,000 2. What amount should be reported as interest expense for 2019? a. b. a. c.

800,000 400,000 C. 200,000 0

Question 1 Answer: D Solution: Interest actually incurred (24,000,000 x 10% x 10/12)

2,000,000

Interest income

( 200,000)

Capitalizable borrowing cost

1,800,000

Question 2 Answer: B Solution: Interest expense for November and December 2019 (24,000,000 x 10% x 2/12)

400,000

3. Sun Company was constructing an asset that qualified for interest capitalization. The construction began at the beginning of the current year and was completed at the end of current year. The construction cost totaled P12,000,000 and was incurred evenly during the current year. The entity had outstanding notes payable during the entire year of construction comprising P6,000,000 8% interest and P9,000,000 9% interest. None of the borrowings were specified for the construction of the qualified asset. 1. What amount of interest should be capitalized? a. 480,000 b. 516,000 c. 810,000

d. 960,000 2. What amount should be reported as interest expense for the current year? a. b. c. d.

960,000 645,000 774,000 0

Question 1 Answer: B Solution: If the construction is financed by general borrowing, the average interest rate is multiplied by average expenditures in computing capitalizable borrowing cost. Principal

Interest

8% note payable

(8% x 6,000,000)

6,000,000

480,000

9% note payable

(9% x 9,000,000)

9,000,000

810,000

Total

15,000,000 1,290,000

Average interest rate (1,290,000/15,000,000)

8.60%

Average expenditures (12,000,000/2)

6,000,000

Capitalizable interest (6,000,000 x 8.6%)

516,000

Question 2 Answer: C Solution: Principal

Interest

Total interest incurred

1,290,000

Capitalizable interest

( 516,000)

Interest expense for the year

774,000

4. Moses Company borrowed P4,000,000 on a 10% note payable to finance a new warehouse which the entity is constructing for own use.

The only other debt of the entity is a P6,000,000, 12% mortgage payable on an office building. At the end of the current year, average accumulated expenditures on the new warehouse totaled P4,750,000. What amount should be capitalized as interest for the current year? a. b. c. d.

400,000 475,000 490,000 522,500

Answer: C Solution: Specific borrowing (4,000,000 x 10%)

400,000

General borrowing ( 750,000 x 12%)

90,000

Capitalizable interest

490,000

Average expenditures applicable to general borrowing (4,750,000 less 4,000,000 specific)

750,000

5. The third year of a construction project of Jilliane Company began with a P3,000,000 balance in construction in progress. Included in that figure is P600,000 of interest capitalized in the first two years. Construction expenditures during the third year were P8,000,000 which were incurred evenly throughout the entire year. The entity had P30,000,000 in interest-bearing debt outstanding in the third year at an interest rate of 9%. 1. What amount of interest for the third year is capitalized? a. b. c. d.

360,000 630,000 936,000 990,000

2. What amount should be reported as interest expense for the third year?

a. b. c. d.

2,700,000 2,070,000 1,980,000 1,350,000

Question 1 Answer: B Solution: Construction in progress-beginning of third year

3,000,000

Average expenditures during the third year (8,000,000/2)

4,000,000

Total

7,000,000

Capitalizable interest

(9% x7,000,000)

630,000

Question 2 Answer: B Solution: Interest incurred in the third year (9% x 30,000,000)

2,700,000

Capitalizable interest

( 630,000)

Interest expense for third year

2,070,000

6. Jam Company started construction on a building at the beginning of the current year and completed construction at year-end. The entity had only two interest notes outstanding during the year and both of these notes were outstanding for all 12 months of the year. The following information is available: Average accumulated expenditures

2,500,000

Ending balance in construction in progress before capitalization of interest

3,600,000

6% note incurred specifically for the project

1,500,000

9% long-term note

5,000,000

What amount should be recorded as cost of the building?

a. b. c. d.

3,780,000 2,680,000 3,750,000 3,825,000

Answer: A Solution: Average expenditures

2,500,000

Specific borrowing

(1,500,000)

General borrowing

1,000,000

Construction in progress-actual expenditures

3,600,000

Capitalizable interest: Specific borrowing (6% x 1,500,000)

90,000

General borrowing (9% x 1,000,000)

90,000

Total cost of building

3,780,000

7. Warhead Company had loans outstanding during 2019 and 2020. Specific construction loan General loan

2,000,000

10%

15,000,000

12%

The entity began the self-construction of a new building on January 1, 2019 and the building was completed on December 31, 2020. Expenditures during 2019 and 2020 were: January 1, 2019

2,000,000

July 1, 2019

4,000,000

November 1, 2019

3,000,000

July 1, 2020

1,000,000

1. What is the cost of the new building on December 31, 2019? a. 9,000,000

b. 9,500,000 c. 9,200,000 d. 9,300,000 2. What is the cost of the new building on December 31, 2020? a. b. c. d.

10,000,000 11,660,000 11,700,000 11,500,000

3. What amount should be reported as interest expense for 2020? a. b. c. d.

3,000,000 2,040,000 1,840,000 0

Question 1 Answer: B (a) Expenditure

(b)

(a x b)

Fractional months

Amount

January 1, 2019

2,000,000

12/12

2,000,000

July 1, 2019

4,000,000

6/12

2,000,000

November 1, 2019

3,000,000

2/12

500,000

9,000,000 Average expenditures in 2019

4,500,000 4,500,000

Applicable to specific loan

( 2,000,000)

Applicable to general loan

2,500,000

Actual expenditures in 2019 Capitalizable interest in 2019:

9,000,000

Specific

(2,000,000 x 10%)

200,000

General

(2,500,000 x 12%)

300,000

Total cost of new building - December 31, 2019 Question 2 Answer: B

9,500,000

Expenditure

Fractional months

Amount

January 1, 2020

9,500,000

12/12

9,500,000

July 1, 2020

1,000,000

6/12

10,500,000

500,000 10,000,000

Average expenditures in 2020

10,000,000

Applicable to specific loan

( 2,000,000)

Applicable to general loan

8,000,000

Cumulative actual expenditures (9,500,000+ 1,000,000)

10,500,000

Capitalizable interest in 2020 Specific

(2,000,000 x 10%)

200,000

General

(8,000,000 x 12%)

960,000

Total cost of new building - December 31, 2020

11,660,000

Question 3 Answer: B Interest on general loan (12% x 25,000,000)

3,000,000

Capitalizable interest on general loan

( 960,000)

Interest expense for 2020

2,040,000

8. During 2019, Israel Company constructed asset costing P4,215,000. The weighted average expenditures during the year amounted to P3,900,000. The entity borrowed P2,000,000 at 7.5% on January 1, 2019. Funds not needed for construction were temporarily invested in short-term securities and earned P59,000 in interest revenue. In addition to the construction loan, the entity had two other notes outstanding during the year, a P1,500,000, 10-year, 10% note payable dated October 1, 2018, and a P1,000,000, 8% 5-year note payable dated November 1, 2018. What amount of interest should be capitalized during 2019? a. b. c. d.

324,800 297,500 273,000 265,800

Answer: D Solution: Specific borrowing (2,000,000 x 7.5%)

150,000

Interest revenue related to specific borrowing

( 59,000)

General borrowing (1,900,000 x 9.2%)

174,800

Capitalizable interest

265,800

Average expenditures

3,900,000

Specific borrowing

(2,000,000)

General borrowing

1,900,000 Principal

Interest

10-year 10% note payable

1,500,000

150,000

5-year 8% note payable

1,000,000

80,000

Total general borrowing

2,500,000

230,000

Average interest rate (230,000/2,500,000)

9.2%

9. During 2019, Joshua Company constructed asset costing P5,000,000, The weighted average expenditures totaled P3,000,000. To help pay for construction, P2,200,000 was borrowed at 10% on January 1, 2019. Funds not needed for construction were temporarily invested in short-term securities yielding P45,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a P2,500,000. 10-year, 9% note payable dated January 1, 2018. 1. What amount of interest should be capitalized during 2019? a. b. c. d.

300,000 150,000 247,000 472,000

2. What amount should be reported as interest expense for 2019? a. 225,000 b. 178,000

c. 153,000 d. 0 Question 1 Answer: C Specific borrowing (2,200,000 x 10%)

220,000

Interest revenue

( 45,000)

General borrowing(800,000 x 9%)

72,000

Capitalizable interest Average expenditures Specific borrowing

247,000 3,000,000 ( 2,200,000)

General borrowing

800,000

Question 2 Answer: C Interest on general borrowing (9% x 2,500,000)

225,000

Capitalizable interest on general borrowing

( 72,000)

Interest expense for 2019

153,000

10. During 2019, Elysee Company constructed a new facility at a cost of P30,000,000. The expenditures for the building, which was finished late in 2019, were incurred evenly during the year. The entity had the following loans outstanding on December 31, 2019: 

10% note to finance specifically the construction, dated January 1,2019, P10,000,000. This note is unpaid on December 31, 2019. Investments were made on the proceeds from this loan and income of P100,000 was realized in 2019.

 

12% 20-year bonds issued at face amount on April 30, 2018, P30,000,000. 8% 5-year note payable, dated March 1, 2018, P10,000,000.

What amount of interest is capitalized as cost of the new building? a. b. c. d.

1,550,000 1,450,000 1,400,000 1,500,000

Answer: B

Solution: Average expenditures(30,000,000/2)

15,000,000

Applicable to specific borrowing

(10,000,000)

Applicable to general borrowing

5,000,000 Principal

Interest

12% 20-year bonds payable

30,000,000

3,600,000

8% 5-year note payable

10,000,000

800,000

Total general borrowing

40,000,000

4,400,000

Average capitalization rate (4,400,000/40,000,000) Interest on specific borrowing

(10% x 10,000,000)

Interest income related to specific borrowing Interest on general borrowing Total capitalizable interest

11% 1,000,000 ( 100,000)

(11% x 5,000,000) 1,450,000...