6. Youandi Plc.

owned a piece of land which it acquired on March 1, 2018 at a cost of

N288million.

During the year ended January 31, 2020 the company constructed a new factory on the land.
The construction was financed from the pool of existing borrowings. Construction began on
May 1, 2019 and was completed on October 31, 2019 at a cost of N432million. The factory
was available for use from that day although production did not start until November 2019.
The useful life of the factory has been estimated to be 50 years.

Throughout the year, the company’s average borrowings were as follows:

Amount Interest Rate
N’000 %
Bank Overdraft 160,000 9.75
Bank Loan 280,000 10.0
Bonds 400,000 8.0

Required:
(a) Outline the core provisions of IAS 23, Borrowing Costs. (7 Marks)

(b) Explain the accounting requirements of the issues in Youandi Plc., with relevant calculations
for the year ended January 31, 2020 and the carrying amount of the factory as at January 31,
2020. (8 Marks)
(Total 15 Marks)

SOLUTION TO QUESTION 6
(a) According to IAS 23 borrowing cost may be capitalised during the acquisition, construction
or production of a qualifying asset. A qualifying asset is any asset which takes a substantial
period of time to get ready for its intended use or sale. Borrowing costs include fees,
transaction costs and amortisation of discount or premium relating borrowing costs. Directly
attributable costs may be capitalised if incurred during the capitalisation period on qualifying
assets.

The capitalisations commence when the borrowing costs have been incurred, expenditure on
the asset has been incurred and construction activities have commenced.

The capitalisation of borrowing costs is suspended where there is an extended period of delay
in the construction work.

The capitalisation ceases when the asset is substantially ready for its intended use or sale.
The borrowing costs of funds borrowed specifically to obtain qualifying asset is the actual
borrowing cost incurred less investment income on temporary investment from those
borrowings.

When an entity uses general borrowing to obtain qualifying asset, the capitalisations rate is
the weighted average of the borrowing costs of the entity.

(b) The borrowing cost relating to the construction of the building is qualified for capitalisation.
The capitalisation rate is the weighted average cost of the borrowed funds. The borrowing

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