Borrowing Costs - Assignment - Answer Key - v2
Borrowing Costs - Assignment - Answer Key - v2
Assignment
1. On 1st May 20x1, Roger took a loan of Php 1,000,000 from a bank at the annual interest rate of 5%. The
purpose of this loan was to finance a construction of a production hall. The construction started on June 1
20x1. Roger temporarily invested Php 800,000 borrowed money during the months of June and July 20x1 at
the rate of 2% p.a.
*Although the funds were withdrawn on 1st May, the capitalization can start only on 1st June 20X1 when all criteria were met (the
construction had not started until 1st June).
2. During 20x2, Roger Co. constructed a new manufacturing facility at a cost of Php 12,000,000. The
weighted average accumulated expenditures for 20x2 were calculated to be Php 5,400,000. The company
had the following debt outstanding at December 31, 2002:
b. 12 percent, 20-year bonds issued at par on April 30, 20x1, Php 8,400,000
Capitalizable borrowing cost = (10% x 3.6M) + [(5.4M – 3.6M) x 11.29%] = 360,000 + 203,220 = 563,220
The interest capitalized is ₱563,220 (the lower of the avoidable interest of ₱563,220 and the actual interest cost incurred of ₱1,512,000
– see computation above).
3. Roger had the following loans in place at the beginning and end of 20x1:
Description 1 January 20x1 31 December 20x1
Bank loan, 6% p.a. 0 200,000
Bank loan, 8% p.a. 130,000 130,000
Debenture stock, 5.5% p.a. 50,000 50,000
a. The bank loan at 6% p.a. was taken in July 20x1 to finance the construction of a new
production hall (construction began on 1 March 20x1)
b. The bank loan at 8% p.a. and debenture stock were taken for no specific purpose and KLM
used them to finance general spending and the construction of a new machinery.
c. Roger used Php 60,000 for the construction of the machinery on 1 February 20x1 and
Php 25,000 on 1 September 20x1.
The “Bank loan, 6% p.a.” is ignored because it is a specific borrowing for another asset (i.e., “production hall” rather than “machinery”).
On January 2, 2023, the company obtained Php 500,000 loan with an 8% interest rate for the building
construction. The loan was outstanding during the entire construction period. The company’s other interest-
bearing debt included two long-term notes of Php 2,000,000 and Php 4,000,000 with interest rates of 6%
and 12%, respectively. Both notes were outstanding during the entire construction period.
Average accumulated expenditures (from general borrowings): Php 1,187,500 (See solution below)
Capitalizable borrowing cost for 2024: Php 79,375 (lower than actual)
MIAW