BORROWING COSTS

Problem 1: (Borrowing Costs on Specific Borrowings)

On January 1, 2021, S.S. Georgie 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, 2021 with a cost of P6,000,000.

Not all the cash borrowed was used immediately, so the interest income of P80,000 was generated by temporarily investing some of the
borrowed funds prior to use. The project was completed on December 31, 2021.

1. How much is the capitalizable borrowing costs for 2021?

2. How much is the interest expense for 2021?
3. What is the carrying amount of the plant on December 31, 2021?
4. Assuming the project was completed on November 30, 2021, how much is the capitalizable borrowing costs for
2021?
5. How much is the interest expense for 2021?
6. What is the carrying amount of the plant on November 30, 2021?

Problem 2: (Borrowing Costs on General Borrowings)

On January 1, 2021, BUFFY Co. had the following borrowings made for general purposes, a part of the proceeds was used to finance the
construction of a high-rise building:

12% short-term note P10,000,000

14% 3-year bank loan 18,000,000
16% 5-year note 22,000,000

The construction of the high-rise building was started immediately and expenditures incurred on the building were as follows:

January 1 P4,800,000
March 31 2,200,000
July 31 3,600,000
October 1 5,400,000
December 31 300,000
16,300,000

1. Compute for the borrowing cost eligible for capitalization in 2021.

2. Compute for the interest expense in 2021.
3. Assuming the total cost of P16,300,000 was incurred evenly during the year, compute for the borrowing cost
eligible for capitalization in 2021.
4. Using the information in item 3, compute for the interest expense in 2021.

Problem 3: (Asset is financed by both specific and general borrowings)

Oakley Company had loans outstanding during 2021 and 2022:

Specific construction loan 2,000,000 10%

General loans 24,000,000 12%
21,000,000 9%

The company 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
June 30, 2021 4,000,000
November 1, 2021 3,000,000
July 1, 2022 1,000,000

1. What is the cost of the new building on December 31, 2021?

2. What is the cost of the new building on December 31, 2022?
3. What is the interest expense for 2022?

Assume instead that the building w as completed on September 30, 2022.

1. What is the cost of the new building on December 31, 2021?
2. What is the cost of the new building on September 30, 2022?
3. What is the interest expense for 2022?
Financial Accounting Theories
1. Which statement is true concerning capitalization of borrowing cost?
I. If the borrowing is directly attributable to a qualifying asset, the borrowing cost is required to be capitalized as cost
of the asset.
II. If the borrowing is not directly attributable to a qualifying asset, the borrowing cost shall be expensed as incurred.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

2. Which of the following may not be considered a qualifying asset?

A. A power generation plant that normally takes two years to construct.
B. An expensive private jet that can be purchased from a local vendor.
C. A toll bridge that usually takes more than a year to build.
D. A ship that normally takes one to two years to complete.

3. Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?
A. Interest is being incurred.
B. Expenditures for the asset have been made.
C. The interest rate is equal to or greater than the cost of capital.
D. Activities necessary to get the asset ready for the intended use are in progress.

4. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is equal to
A. Actual borrowing cost incurred
B. Actual borrowing cost incurred up to completion of asset
C. Actual borrowing cost incurred up to completion of asset minus any investment income from the temporary investment of
the borrowing
D. Zero

5. If the qualifying asset is financed by general borrowing, the capitalizable borrowing cost is equal to
A. Actual borrowing cost incurred
B. Total expenditures on the asset multiplied by a capitalization rate
C. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred, whichever is
lower
D. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred, whichever is
higher

6. Capitalization of borrowing cost

A. Shall be suspended during temporary period of delay
B. May be suspended only during extended period of delay in which active development is delayed.
C. Shall never be suspended.
D. Shall be suspended only during extended period of delay in which active development is delayed.

7. The period of time during which interest must be capitalized ends when
A. The asset is substantially complete and ready for the intended use.
B. No further interest is being incurred.
C. The asset is abandoned, sold or fully depreciated.
D. The activities that are necessary to get the asset ready for the intended use have begun.