BORROWING COSTS

1. The capitalization of interest is appropriate' during a construction delay that is

a. Related to permit processing or inspection
b. Permanent due to extended period of interruption
c. All of these require capitalization of interest
2. 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. Neither I or II
d. Both I and II
3. 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
4. Which of the following could be treated as qualifying asset for the purpose of
capitalizing borrowing cost?
a. Investment property
b. Financial asset at fair value
c. Inventory that is manufactured in large quantity
d. Biological asset
5. Which 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 the bank prime rate
d. Activities necessary to get the asset ready for the intended use are in
progress
6. 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. Zero
7. Capitalization of interest 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.
8. Which is required for borrowing costs incurred directly attributable to a
qualifying asset?
 a. Recognize as an expense in the period incurred
b. Capitalize as part of the cost of the asset
c. Either recognize as an expense in the period incurred or capitalize as part
of the cost of the asset
d. Recognize as deferred charge
9. Which should not be considered a qualifying asset?
a. A power generation plant that takes two years to construct
b. An expensive jet that can be purchased from a 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
10. Interest income on specific borrowing for qualifying asset
a. Reduces the cost of the qualifying asset
b. Reduces interest expense reported in the income statement
c. Increases equity
d. Must be credited to interest income
11. Which is the approach in accounting for interest incurred in financing
specifically construction of property?
a. Capitalize only the actual interest incurred during construction
b. Charge construction with all costs of funds employed
c. Capitalize no interest during construction
d. Capitalize interest equal to the prime rate interest
12. Which is not a disclosure requirement in relation to borrowing cost?
a. Accounting policy adopted for borrowing cost
b. Borrowing cost capitalized during the period
c. Segregation of qualifying asset from the other assets
d. Capitalization rate used to determine the amount of borrowing cost eligible
for capitalization
13. Which statement is correct regarding capitalized interest?
a. The amount of capitalized interest on general borrowing is the lower
of actual interest incurred or computed capitalized interest.
b. Capitalized interest is reduced by income received on the unexpended
portion of the general construction loan
c. Interest after completion of construction is capitalized
d. All of these statements are correct
14. When computing the amount of interest to be capitalized the concept of
avoidable interest refers to
a. That portion of total interest which would not have been incurred if
expenditures for asset construction had not been made.
b. The total interest actually incurred.
c. A cost of capital charge for shareholders' equity.
d. That portion of average accumulated expenditures on which no interest
was incurred.
15. 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.
16. Which is a required disclosure regarding interest?
a. Total capitalized interest for the period
b. The capitalization rate used to determine the capitalizable interest
c. All of these are required disclosure regarding interest
d. Total interest incurred for the period
17. Which of the following cost may not be eligible for capitalization as borrowing
cost?
a. Amortization of discount or premium relating to borrowings that qualify for
capitalization
b. Exchange difference arising from foreign currency borrowings pertaining to
a qualifying asset.
c. Imputed cost of equity
d. Interest on bonds issued to finance the construction of a qualifying asset
18. Borrowing cost is defined as
a. Exchange difference arising from foreign currency borrowing to the extent
that this is regarded as an adjustment to interest cost.
b. Interest and other cost that an entity incurs in connection with
borrowing of fund.
c. Interest expense using the effective interest method.
d. Finance charge in respect of finance lease.
19. Borrowing cost can be capitalized as cost of the asset when
a. The asset is a qualifying asset and it is not probable that the borrowing cost
will result in future economic benefit to the entity.
b. The asset is a qualifying asset and it is probable that the borrowing cost will
result in future economic benefit to the entity but the cost cannot be measured
reliably.
c. The asset is a qualifying asset and it is probable that the borrowing
cost will result in future economic benefit to the entity and the cost can
be measured reliably.
d. The asset is a qualifying asset.
20. Which statement about the capitalization of borrowing cost as part of the cost
of a qualifying asset is true?
a. If funds come from general borrowings, the amount to be capitalized
is based on the average expenditures.
b. Capitalization always continues until the asset is brought into use.
c. Capitalization always commences as s0on as expenditure of the asset is
incurred.
d. Capitalization always commences as soon as interest on relevant
borrowing is being incurred
21. Which statement is correct regarding capitalized interest?
a. The amount of capitalized interest on general borrowing is the lower
of actual interest incurred or computed capitalized interest.
b. Capitalized interest is reduced by income received on the unexpended
portion of the general construction loan
c. Interest after completion of construction is capitalized
d. All of these statements are correct
22. Which of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in connection with the purchase of land to be used
as a building site should be debited to the land account and not to the building
account.
 b. The amount of interest cost capitalized during the period should not
exceed the actual interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are
temporarily invested, any interest earned should be recorded as interest
revenue.
d. The minimum amount of interest to be capitalized is determined by
multiplying a weighted average interest rate by the amount of average
accumulated expenditures on qualifying assets during the period.
23. Construction of a qualifying asset is started on April 1 and finished on
December 1. The fraction used to multiply an expenditure made on April 1 to
find weighted-average accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
24. When funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds not needed to pay for construction
may be temporarily invested in interest-bearing securities. Interest earned on
these temporary investments should be
a. offset against interest cost incurred during construction.
b. used to increase the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of
interest to be capitalized.
d. recognized as revenue of the period.
25. Interest cost that is capitalized should
a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off
equally over a 40-year period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. None of these answer choices are correct.
26. In which of the following instances is the capitalization of the borrowing costs
under PAS 23 would most likely be suspended?
a. Construction is temporarily stopped for the curing of concrete
b. Active development is stopped to give time for the engineers to reevaluate
a design flaw
c. The construction of a bridge is disrupted by troubled waters
d. The construction of a building is discontinued because it is
condemned by the government. The resumption of development is
uncertain
27. Borrowing cost that do not directly relate to the acquisition, construction or
production of a qualifying asset are
a. capitalized as cost of a qualifying asset
b. expensed
c. expensed, except when borrowing cost relates to other asset
d. any of these as a matter of accounting policy