Pas-23-Borrowing-Cost PDF

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BORROWING COSTPROBLEM 53-1 (IFRS)On January 1, 2015, 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, 2015 with a cost P6,000,000. Not all the cash borrowed was used...

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BORROWING COST PROBLEM 53-1 (IFRS) On January 1, 2015, 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, 2015 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, 2015. What is the carrying amount of the plant on November 30, 2015? a. 6,000,000 b. 6.470,000 c. 6.520,000 d. 6,550,000 Answer-b.6.470,000 Construction cost Interest (6,000,000 x 10% x 11/12 Interest income Total cost of plant

6,000,000 550,000 (80,000) 6,470,000

PAS 33, paragraph 12, provides that if the funds are borrowed specifically for the purpose of acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual borrowing cost incurred during the period less any investment income from temporary investment of these borrowings.

PROBLEM 53-2 (IFRS) ABC Company had the following general borrowings during 2015 which were used to finance the construction of a new building: Principal Borrowing Cost 10% bank loan 2,800,000 280,000 10% short-term note 1,600,000 160,000 12% long-term loan 2,000,000 240,000 6,400,000 680,000 The construction began on January 1, 2015 and the building was completed on December 31, 2015. In the first phase of the construction, there were idle funds which the entity invested and earned interest income of P100,000. Expenditures on the building were made as follows: January 1 March 31 June 30 September 30 December 31

400,000 1,000,000 1,200,000 1,000,000 400,000

1. What interest rate should be used to calculate capitalized borrowing cost? a. 10.625% b. 10.00% c. 12.00% d. 10.67%

2. What is the amount of capitalized borrowing cost? a. 212,500 b. 112,500 c. 425,000 d. 150,000 Answer to no.1- a.10.625% Answer to no.2-a.212,500 Date (a) Expenditure January 1 400,000 March 31 1,000,000 June 30 1,200,000 Sept 30 1,000,000 Dec 31 400,000 Total 4,000,000

(b) Fractional mos. 12/12 9/12 6/12 3/12 0/12

Average expenditures Capitalization rate (680,000/6,400,000) Capitalized borrowin cost

(a x b) Amount 400,000 750,000 600,000 250,000 0 2,000,000 2,000,000 10.625% 212,500

PAS 23, paragraph 14, provides that if the funds are borrowed generally and used for acquiring a qualifying asset, the amount of capitalizable borrowing cost is equal to the average carrying amount of the asset during the period multiplied by a capitalization rate or average interest rate. However, the capitalized borrowing cost shall not exceed the actual interest incurred. The computed amount of 212,500 is the capitalizable borrowing cost because it is less than the actual borrowing cost of P680,000. The difference between P680,000 and P212,500 or P467,500 is charged to interest expense.

The capitalization rate or average interest rate is equal to the total annual borrowing cost divided by the total general borrowings outstanding during the period. No specific guidance is provided for general borrowing with respect to its investment income. Accordingly, any investment income from general borrowing is not deducted from capitalized borrowing cost. Thus, the investment income of P100,000 is ignored because the construction is financed by general borrowings.

PROBLEM 53-3 (AICPA Adapted) On January 1, 2015, Cruise Company borrowed P30,000,000 evidenced by a 3-year 10% note payable and began construction of a cruise ship. Annual payments of principal and interest in the amount P13,000,000 are due every December 31. The entity used all proceeds as down payment for construction. What amount should be reported as interest expense related to the note in the income statement for 2016? a. 3,000,000 b. 2,000,000 c. 1,000,000 d. 0 Answer- d. 0 An interest incurred during the construction period on specific borrowing should be capitalized as cost of the asset.

PROBLEM 53-4 (AICPA Adapted) Sun Company was constructing an asset that qualified for interest capitalization. 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. What interest rate should be used to calculate capitalized interest on the construction? a. 9.00% b. 8.50% c. 8.00% d. 8.60% Answer: d.8.60% Principal Interest 8% note payable 6,000,000 x 8% 6,000,000 480,000 9% note payable 9,000,000 x 9% 9,000,000 810,000 Total 15,000,000 1,210,000 Average interest rate (1,210,000/15,000,000)

8.60%

PROBLEM 53-5 (AICPA Adapted) Clay Company star ted construction of a new office building on January 1, 2015, and moved into the finished building on July 1, 2016. Of the P25,000,000 total cost, P20,000,000 was incurred in 2015 evenly throughout the year. The incremental borrowing rate was 12% throughout 2015 and the total amount of interest incurred was P1,020,000.

What amount should be reported as capitalized interest on December 31, 2015? a. P1,020,000 b. P1,200,000 c. P1,500,000 d. P2,400,000 Answer- a. P1,020,000 In computing the average expenditure, the amount of P20,000,000 is simply divided by 2 or P10,000,000 because the expenditures are incurred evenly in 2015. The interest on average expenditures in P10,000,000 multiplied by 12% or P1,200,000. The capitalized borrowing cost is limited to the actual borrowing cost incurred of P1,020,000 because this is lower than the computed amount of P1,200,000.

PROBLEM 53-6 (IFRS) On January 1. 2015, 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 completed on October 1, 2015. The loan was repaid on December 31, 2015 and P200,000 investment income was earned in the period to October 31 on the proceeds of the loan not yet used for renovation. What is the amount of borrowing cost to be included in the cost of the building? a. 2,400,000 b. 2,200,000 c. 2,000,000 d. 1,800,000

Answer: d. 1,800,000 Interest incurred (24,000,000 x 10% x 10/12) Interest income Capitalizable borrowing cost

2,000,000 (200,000) 1,800,000

PROBLEM 53-7 (PHILCPA Adapted) Marian Company borrowed P20,000,000 at 10% partly for general purposes and partly to finance the construction of a building on January 1, 2015. The loan shall be repaid commencing the month following completion of the building. Expenditures incurred evenly during the year for the completed building totaled P12,000,000 on December 31, 2015. The entity earned interest of P200,000 for the year on the unexpended portion of the loan. What amount of interest is capitalized on December 31, 2015? a. 1,200,000 b. 1,000,000 c. 600,000 d. 400,000 Answer- C. 600,000 The average expenditures amount to P12,000,000 divided by 2 or P6,000,000. The interest is P6,000,000 times 10% or P600,000. The investment income of P200,000 is ignored because the construction is financed by general borrowing.

PROBLEM 53-8 (IAA) 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 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. 400,000 b. 475,000 c. 490,000 d. 522,500 Answer- C. 490,000 Specific borrowing (4,000,000 x 10%) General borrowing (750,000 x 12%) Capitalized interest

400,000 90,000 490,000

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

750,000

PROBLEM 53-9 (IAA) 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. 360,000 b. 630,000 c. 936,000 d. 990,000 2. What amount should be reported as interest expense for the third year? a. 2,700,000 b. 2,070,000 c. 1,980,000 d. 1,350,000 Answer to no.1-B.630,000 Construction in progress-beginning of 3rd year Average expenditures during the 3rd year (8,000,000/2) Total Capitalized interest (7,000,000 x 9%) Answer to.no.2-B.2,070,000 Interest incurred in the 3rd year (30,000,000 x 9%) Capitalized interest Interest expense for 3rd year

3,000,000 4,000,000 7,000,000 630,000

2,700,000 (630,000) 2,070,000

PROBLEM 53-10 (IAA) Jam Company started construction on a building at the beginning of the current year and completed construction at the year end. The entity had only two interest notes outstanding during the year end and both of these notes were outstanding for all 12 months of the year. The ff. information is available: Average accumulated expenditures 2,500,000 Ending balance in construction in progress 3,600,000 before capitalization of interest 6% note incurred specifically for the project 1,500,000 9% long term note 5,000,000 What is the cost of the building? a. 3,780,000 b. 2,680,000 c. 3,750,000 d. 3,825,000 Answer: A. 3,780,000 Average expenditures Specific borrowing General borrowing Construction in progress-actual expenditure Capitalizable interests: Specific borrowing (1,500,000 x 6%) General borrowing (1,000,000 x 9%) Total cost of building

2,500,000 (1,500,000) 1,000,000 3,600,000 90,000 90,000 3,780,000

PROBLEM 53-11 (IAA) During 2015, Joshua Company constructing 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, 2015, and 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 P2,500,000, 10 year, 9% note payable dated January 1, 2014. 1. What amount of interest should be capitalized during 2015? a. 300,000 b. 150,000 c. 247,000 d. 472,000 2. What amount should be reported as interest expense for 2015? a. 225,000 b. 178,000 c. 153,000 d. 0 Answer to no.1- C. 247,000 Average expenditures 3,000,000 Specific borrowing (2,200,000) General borrowing 800,000 Specific borrowing (2,200,000 x 10%) Interest revenue General borrowing (800,000 x 9%) Capitalized interest

220,000 (45,000) 72,000 247,000

Answer to no.2-C.153,000 Interest on general borrowing (2,500,000 x9%) Capitalizable interest on general borrowing Interest expense for 2015

225,000 (72,000) 153,000

PROBLEM 53-12 (AICPA Adapted) During 2015, Elysee Company constructed a new facility at a cost of P30,000,000. The expenditures for the building, which was finished late in 2015, were incurred evenly during the year. The entity had the ff. loans outstanding on December 31, 2015:  10% note to finance specifically the construction, dated January 1, 2015, P10,000,000. This note is unpaid on December 31, 2015. Investments were made on the proceeds from this loan and income P100,000 were realized on 2015.  12% 20-year bonds issued at face amount on April 30, 2014, P30,000,000.  8% 5-year note payable, dated March 1, 2014, P10,000,000. What amount of interest is capitalized as cost of the new building? a. 1,550,000 b. 1,450,000 c. 1,400,000 d. 1.500,000 Answer- B. 1,450,000

Average expenditures (30,000,000/2) Applicable to specific borrowing Total general borrowing

12% 20-year bonds payable 8% 5-year notes payable Total general borrowing

15,000,000 (10,000,000) 5,000,000

Principal Interest 30,000,000 3,600,000 10,000,000 800,000 40,000,000 4,400,000

Average capitalization rate (4,400,000/40,000,000) Interest on specific borrowing(10,000,000x10%) Interest income related to specific borrowing Interest on general borrowing (5,000,000x11%) Total capitalizable interest

11%

1,000,000 (100,000) 550,000 1,450,000

PROBLEM 53-13 (IAA) During 2015, Israel Company constructed asset costing P4,215,000. The weighted average expenditure during 2015 amounted to P3,900,000. The entity borrowed P2,000,000 at 7.5% on January 1, 2015. 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, 2013, and a P1,000,000, 8%, 5year note payable dated November 2, 2014.

What amount of interest should be capitalized during 2015? a. 324,800 b. 297,500 c. 273,000 d. 265,800 Answer: d. 265,800 Average expenditures Specific borrowing General borrowing

10-year, 10% notes payable 5-year, 8 % notes payable Total general borrowing

3,900,000 (2,000,000) 1,900,000 Principal 1,500,000 1,000,000 2,500,000

Average interest rate(230,000/2,500,000) Specific borrowing (2,000,000 x7.5%) Interest revenue related to specific borrowing General borrowing (1,900,000 x 9.2%) Capitalizable interest

Interest 150,000 80,000 230,000 9.2% 150,000 (59,000) 174,800 265,800

PROBLEM 53-14 (IFRS) Congo Company commenced construction of a new plant on February 1, 2015. The cost of P18,000,000 was paid in full to the contractor on February 1, 2015 and was funded from existing general borrowings. The construction was completed on September 30, 2015.

The borrowings during 2015 comprised the following: Bank A- 6% 8,000,000 Bank B- 6.6% 10,000,000 Bank C- 7% 30,000,000 What is the amount of borrowing cost that should be capitalized in relation to the plant? a. 1,215,000 b. 810,000 c. 911,250 d. 0 Answer: b. 810,000 Annual interest Bank A 8,000,000 x 6% Bank B 10,000,000 x 6.6% Bank C 30,000,000 x 7% Total 48,000,000 Average interest rate (3,240,000/48,000,000) Capitalized borrowing cost (18,000,000 x 6.75% x 8/12)

480,000 660,000 2,100,000 3,240,000 6.75% 810,000

The construction period is 8 months from February 1, 2015 to September 30, 2015. Total annual interest Capitalizable borrowing cost Interest expense for 2015

3,240,000 (810,000) 2,430,000

PROBLEM 53-15 (IFRS) Ultimate Company, a socially responsible multinational entity, decided to construct a tunnel that will link two sides of the village that were separated by a natural disaster years ago. Realizing its role as a good corporate citizen, the entity has been on this village a couple of years exploring oil and gas in the nearby offshore area. The tunnel would take two years to build and the total capital outlay needed for the construction would not be less than P20,000,000. To allow itself a margin of safety, the entity borrowed P25,000,000 from three sources and used the extra P5,000,000 for working capital purposes. Financing was arranged as follows: Bank term loan-7% Institutional borrowing-8% Corporate bonds-9%

5,000,000 10,000,000 10,000,000

In the first phase of the construction of the tunnel, there were idle funds of P10,000,000 which the entity invested for the period of six months. Income from the investment was P500,000. What amount of borrowing cost should be capitalized as cost of the asset upon completion?

Problem 47-12 Hothead Company had the following loans outstanding for 2016. Specific construction loan Generic loan

1,000,000 20,000,000

10% 12%

The entity began the self-construction of a building on January 1, 2016 and the building was completed on December 31, 2016. The following expenditures were made during the year. January July November

1 1 1

1,000,000 2,000,000 3,000,000

What is the cost of the new building? a. 6,000,000 b. 6,280,000

c. 6,300,000 d. 6,250,000

Problem 47-13 Warhead company had loans outstanding during 2021 and 2022. Specific construction 2,000,000 loan General loan 25,000,000

10% 12%

The entity began the self construction of a new building on January 1, 2021 and the building was completed on december 31, 2022. Expenditures during 2021 and 2022 were: January 1, 2021 2,000,000 July 1, 2021 4,000,000 November 1, 2021 3,000,000 July 1, 2021 1,000,000 1. What amount should be reported as cost of the new building on december 31, 2021? a. 9,000,000 b. 9,500,000 c. 9,200,000 d. 9,300,000 2. What amount should reported as cost of the new building on december 31, 2022? a. 10,000,000 b. 11,660,000 c. 11,700,000 d. 11,500,000 3. What amount should be reported as interest expense for 2022? a. 3,000,000 b. 2,040,000 c. 1,840,000 d. 0

Problem 47-14 Molave Company had the following outstanding loans during 2016 and 2022. Specific construction loan General loan

3,000,000 25,000,000

10% 12%

The entity began the self-construction of a new building on January 1, 2021 and the building was completed on June 30,2022. The following expenditures were made in 2021 and 2022: January

1, 2021

4,000,000

April December March

1, 2021 1, 2021 1, 2022

5,000,000 3,000,000 6,000,000

1. What amount should be reported as cost of the new building on december 31, 2021? a. 12,000,000 b. 12,900,000 c. 12,300,000 d. 12,600,000 2. What amount should be reported as cost of the new builsing on june 30,2022? a. 18,000,000 b. 19,884,000 c. 20,868,000 d. 19,377,000 3. What amount should be reported as interest expense? a. 2,316,000 b. 2,166,000 c. 2,016,000 d. 1,500,000

Problem 47-15 On june 1, 2021, circus company began construction of a new manufacturing plant. The plant was completed on October 31, 2022. Expenditures on the project were: July 1, 2021 5,000,000 October 1, 2021 4,000,000 February 1, 2021 3,000,000 April 1, 2021 2,000,000 September 1, 2021 2,000,000 October 1, 2021 500,000 On july 1, 2021, the entity obtained a P7,000,000 construction loan with a 6% interest rate. The loan was paid on december 31, 2022. The only other interest-bearing debt was a long-term note for P15,000,000 with an interest rate of 9%. This note was outstanding during 2021 and 2022. The fiscal year-end is december 31. 1. What amount of interest should be capitalized in 2021? a. 270,000 b. 210,000 c. 540,000 d. 420,000 2. What amount of interest should be capitalized in 2022? a. 1,000,000 b. 1,350,000 c. 250,000 d. 857,000 3. What amount should be reported as interest expense for 2022? a. 1,350,000 b. 1,770,000 c. 913,000 d. 420,000

Problem 47-16 on January 1, 2021, Gemini company contracted with a contractor to construct a building for P20,000,000. Gemini is required to make five payments in 2021 with the last payment scheduled on the date of completion. The building was completed on december 31, 2021. The entity made the following payments during 2021: January 1 2,000,000 March 31 4,000,000 June 30 6,100,000 September 30 4,400,000 December 31 3,500,000 The entity had the following debt outstanding on december 31, 2021:  12% 4-year note dated January 1, 2021, with interest compounded quarterly, both principal and interest due december 31, 2024, relating specifically to the building project. 8,500,000  10% 10-year note dated december 31, 2020 with simple interest and interest payable annually on december 31. 6,000,000  12% 5-year note dated december 31, 2020 with simple interest and interest payable annually on december 31. 7,000,000 What...