BORROWING COST

Problem 51-1 ( IFRS)

On January 1, 2019, Hamlet Company borrowed ₱6,000,000 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 of ₱6,000,000.

Not all he cash borrowed was used immediately, so interest income of ₱80,000 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. 6,000,000
b. 6,470,000
c. 6,520,000
d. 6,550,000
 BORROWING COST
SOLUTION
Construction cost 6,000,000
Interest ( 6,000,000 x 10% x 11/12) 550,000
Interest income (80,000)
Total cost of plant 6,470,000

PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of acquiring a
qualifying asset, the amount of capitalized borrowing cist is the actual borrowing cost incurred during the
period less any investment income from the temporary investment of those borrowings.
 On January 1, 2019, Cagayan Company took out a loan of ₱24,000,000 in order to finance specifically the
renovation of a building. The renovation work started on the same date.

The loan carried annual interest of 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 in the
period to October 31 on the proceeds of the loan not yet used fro renovation.

1. What amount of capitalized 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. 800,000
b. 400,000
c. 200,000
d. 0
SOLUTION
Question 1 Answer d
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

Interest expense for November and December 2019

(24,000,000 x 10% x 2/12) 400,000

The interest from November 1 to December 31, 2019 is charged to interest expense because the building was
completed on October 31, 2019.
 TRUE OR FALSE

Assets under construction for a company’s own

use do not qualify for interest cost
capitalization.
false
Which of the following assets do not qualify for capitalization of interest costs incurred
during construction of the assets?
a. Assets under construction for a company's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their
intended use.
answer

D
The period of time during which interest must be capitalized ends when

a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have
begun.

•a