TABANI’S SCHOOL OF ACCOUNTANCY

FAR-I (CAF – 05) BORROWING COST (IAS-23)

SPECIFIC BORROWINGS
Q.1. Swan Limited borrowed a loan from bank on 12% per annum amounting to Rs.1,000,000 for the
construction of power generation facilities of the company. The loan was received on January 01 and
utilized Rs.300,000 on Qualifying Asset. On January 01, the company deposited the remaining amount
in a bank yielding interest @ 6%. Whole of the amount is withdrawn and paid to contractor on March
01. The company returned the loan to bank after 9 months i.e. on October 01. You are required to
calculate the amount of borrowing cost eligible for capitalization.
GENERAL BORROWINGS
Q.2. MCQ (Private) Limited has the following loans outstanding as at December 31, 2015.
Rs.
Loan – 1 @ 6% 300,000
Loan – 2 @ 8% 200,000
Loan – 3 @ 9% 150,000
All the three loans were brought forward from previous year. Neither loan is acquired during the year
nor is paid.
The company spent following amounts on construction of an asset.
Rs.
January 31, 2015 70,000
April 01, 2015 80,000
December 01, 2015 10,000
Required:
Calculate.
(i) Capitalization rate
(ii) Borrowing cost eligible for capitalization

Q.3 On July 1, 2009, Qureshi Steel Limited (QSL) signed an agreement with Pak Construction Limited
for construction of a factory building at a cost of Rs. 100 million. It was agreed that the factory
would be ready for use from January 1, 2011. The terms of payments were agreed as under:
(i) 10% advance payment would be made on signing of the agreement. The advance paid would be
adjusted at 10% of the quarterly progress bills.
(ii) 5% retention money would also be deducted from the progress bills. Retention money will be
refunded one year after completion of the factory building.

(iii) Progress bills will be raised on last day of each quarter and settled on 15th of the next month.
The under mentioned progress bills were received and settled by QSL as per the agreement:

Invoice date Amount (Rs.)

September 30, 2009 30 million
December 31, 2009 20 million
March 31, 2010 10 million
June 30, 2010 15 million

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TABANI’S SCHOOL OF ACCOUNTANCY
FAR-I (CAF – 05) BORROWING COST (IAS-23)
On April 30, 2010 an invoice of Rs. 1.5 million was raised by the contractor for damages sustained at
the site, on account of rains. After negotiations, QSL finally agreed to make additional payment of
Rs.1.0 million to compensate the contractor. The amount was paid on May 15, 2010. It is expected
that 75% of the payment would be recovered from the insurance company.
The cost of the project has been financed through the following sources:
(i) Issue of right shares amounting to Rs. 15 million, on September 1, 2009. The company has
been following a policy of paying dividend of 20% for the past many years.
(ii) Bank loan of Rs. 25 million obtained on December 1, 2009. The loan carries a markup of 13%
per annum. The principal is repayable in 5 half yearly equal instalments of Rs. 5 million each
alongwith the interest, commencing from May 31, 2010. Loan processing charges of Rs. 0.5
million were deducted by the bank at the time of disbursement of loan. Surplus funds, when
available, were invested in short term deposits at 8% per annum.
(iii) Cash withdrawals from the existing running finance facility provided by a bank. Average
running finance balance for the year was Rs. 60 million. Markup charged by the bank for the
year was Rs. 9 million.
Required: Compute cost of capital work in progress for the factory building as of June 30, 2010 in
accordance with the requirements of relevant IFRSs.
(Borrowing costs calculations should be based on number of months) (18 marks)

Q.4 On September 1, 2008, Spin Industries Limited (SIL) started construction of its new office building
and completed it on May 31, 2009. The payments made to the contractor were as follows:
Date of Payment Rupees
September 1, 2008 10,000,000
December 1, 2008 15,000,000
February 1, 2009 12,000,000
June 1, 2009 9,000,000
In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1, 2008 for obtaining a
permit allowing the construction of the building.
The project was financed through the following sources:
(I) On August 1, 2008 a medium term loan of Rs. 25 million was obtained specifically for the
construction of the building. The loan carried mark up of 12% per annum payable semi-annually.
A commitment fee @ 0.5% of the amount of loan was charged by the bank.
Surplus funds were invested in savings account @ 8% per annum. On February 1, 2009 SIL paid
the six monthly interest plus Rs. 5 million towards the principal.
(II) Existing running finance facilities of SIL
Running finance facility of Rs. 28 million from Bank A carrying mark up of 13%
payable annually. The average outstanding balance during the period of construction was
Rs. 25 million.
Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the
period of construction was Rs. 3 million and the average running finance balance during
that period was Rs. 20 million.
Required: Calculate the amount of borrowing costs to be capitalized on June 30, 2009 in accordance
with the requirements of International Accounting Standards. (Borrowing cost calculations should be
based on number of months). (18)
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TABANI’S SCHOOL OF ACCOUNTANCY
FAR-I (CAF – 05) BORROWING COST (IAS-23)
Q.5. On 1 July 2015, Minhas Manufacturers Limited (MML) commenced construction of its new factory
building and completed the work on 30 June 2016. Following information is available in this respect:
(i) The agreed price of the contract was Rs. 100 million which was financed through the
following sources:
Bank loan of Rs. 80 million was obtained on 1 June 2015. The loan carries a mark-up
of 10.9436% per annum and is repayable in six semi-annual instalments of Rs. 16 million
each commencing from 30 November 2015.
The remaining amount was financed through cash withdrawals from MML’s existing
running finance facilities. Details of these facilities are as follows:
Running finance
Balance as on 30 June Average
Name of bank Limit 2016 Mark-up %
balance
----------- Rs. in million -----------
Bank A 50 33 40 11%
Bank B 40 5 30 13%
(ii) Due to delay in supply of construction material, construction work was suspended from 1
November 2015 to 30 November 2015.
(iii) The following payments were made to the contractor net of 5% retention money which is
refundable one year after completion of the building:
Date of payment 1-06-2015 1-08-2015 1-12-2015 1-04-2016 1-08-2016
Net amount paid (Rs. in 9.5 28.5 28.5 19.0 9.5
million)

(iv) Surplus funds, if any, were invested @ 7% per annum.

Required: Show how the above information would be disclosed in MML’s statement of financial
position as on 30 June 2016 in accordance with the International Financial Reporting Standards.
Show all necessary workings. Borrowing costs are to be calculated on the basis of number of months. (17)
Q.6. On 01 January 2012, Marvellous Engineering Limited (MEL) started construction of its new factory.
The construction work was completed on 30 November 2012. The payments made to the contractor
were as follows:
Date of payment Rs. in million
01-Jan-12 100
01-Apr-12 310
15-Dec-12 90
The construction work was financed through the following sources:
Date Description Rs. in million
01-Jan-12 12% Redeemable preference shares 150
01-Apr-12 14% TFCs for four years 300
01-Jul-12 Issue of right shares (estimated return is 22%) 50
The following additional information is also available:
(i) The preference shares would be redeemed on 31 December 2016.
(ii) Surplus funds were invested in a savings scheme @ 9% per annum.
(iii) Due to delay in supply of construction material, the construction work was suspended from
01 June 2012 to 30 June 2012.
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TABANI’S SCHOOL OF ACCOUNTANCY
FAR-I (CAF – 05) BORROWING COST (IAS-23)
Required: Calculate the amount of borrowing costs that may be capitalized during the year ended 31
December 2012 in accordance with the requirements of International Financial Reporting Standards.
(Assume that calculations of borrowing costs are based on number of months) (10)
Q.7 On 1 March 2010, Granite Corporation (GC) started the construction of a new plant to meet the growing
demand for its products. The new plant was completed at a cost of Rs.100 million on 31 May 2011.

GC financed the cost of the project from the following sources:

(i) On 1 March 2010, a 7-year loan of Rs.70 million was obtained specifically for the construction
of the plant. The loan carried markup @ 13% per annum payable semi- annually. An
arrangement fee @ 1% of the loan amount was paid to the bank.
Two installments, each comprising of repayment of principal of Rs.5 million with interest, were
paid on 31 August 2010 and 28 February 2011.
(ii) GC also has a running finance facility of Rs.100 million carrying mark-up @ 14% per annum.
Average utilization of this facility, prior to commencement of construction was Rs.10 million.
Any additional amount required for the project was provided through this facility.
(iii) Surplus funds were used to reduce the running finance utilization or invested in savings account
@ 8% per annum.
Payments made to the contractor were as follows:
Payment date Rs. in million
01 March 2010 25
31 January 2011 65
30 September 2011 10
The construction work was suspended from 1 February 2011 to 28 February 2011. The suspension was
caused due to delay in shipment of essential components for the installation of the plant.
Required:
Calculate the amount of borrowing costs that may be capitalized during the years ended 30 June 2010 and
2011 in accordance with the requirements of International Financial Reporting Standards. (20)

Q.8. Comfort Housing Limited (CHL) is developing a housing scheme. The construction work is being
carried out by Smart Engineers. An agreement in this respect was signed on 1 July 2012. The total cost
of construction has been agreed at Rs.250 million and the project is to be completed by 30 June 2014.
Other related information is as follows:
(i) On 1 April 2012, a running finance facility of Rs.100 million carrying a mark-up at 14% per
annum, was obtained from a local bank.
(ii) The receipts and payments from the above account, upto 30 June 2013 are as follows:
Receipts
Date Description Rs. in million
01-Apr-2012 12% Loan, repayable on 31 December 2013 30
01-Sep-2012 Down payment receipts from the customers 25
01-Jan-2013 Collection of the 1st installment 15
01-Apr-2013 Collection of the 2nd installment 18

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 TABANI’S SCHOOL OF ACCOUNTANCY
FAR-I (CAF – 05) BORROWING COST (IAS-23)
Payments
Date Rs. in million
30-Apr-2012 25
31-Jul-2012 35
31-Jan-2013 40
31-May-2013 48

(iii) Surplus funds were invested in a saving scheme @ 8% per annum.

(iv) Due to an objection raised by the Building Control Authority, construction work was
suspended from 1 March 2013 to 31 March 2013.
Required: Compute the amount of borrowing costs to be capitalised for the year ended 30 June 2013 in
accordance with the requirements of the International Financial Reporting Standards. (Borrowing costs
should be calculated based on number of months) (10)
Q.9. Morskoy Inc. is constructing, a warehouse that will take about 18 months to complete. It began
construction on January 01, 2002. The following payments were made during 2002.

Rs.’000
January 31 -------------------------------------------------------------- 200
March 31 ---------------------------------------------------------------- 450
June 30 ------------------------------------------------------------------ 100
October 31 -------------------------------------------------------------- 200
November 30 ----------------------------------------------------------- 250

The first payment on January 31 was funded from the entity’s pool of debt. However, the entity
succeeded in raising a medium-term loan for an amount of Rs.800,000 at March 31, 2002, with
interest of 9 percent per annum. These funds were specifically used for this construction. Excess
funds were temporarily invested at 6 percent per annum. The pool of debt was again used to an
amount of Rs.200,000 for the payment on November 30, which could not be funded from the
medium-term loan.
The construction project was temporarily halted for 3 weeks in May when substantial technical and
administrative work was carried out.

Morskoy Inc. adopted the accounting policy of capitalizing borrowing costs.

The following amounts of debt were outstanding at the balance sheet date, December 31, 2002.

Rs.’000
Medium-term loan (see description above) ------------------------ 800
Bank overdraft --------------------------------------------------------- 1,200
(The weighted average amount outstanding during the year was
Rs.750,000 and total interest charged by the bank amounted to
Rs.33,800 for the year)
A 10 percent, 7-year note dated October 31, 1997 ------------ 9,000
Required:
Calculate the amount of the borrowing cost to be capitalized for the year ended December 31, 2002.

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TABANI’S SCHOOL OF ACCOUNTANCY
FAR-I (CAF – 05) BORROWING COST (IAS-23)
Q.10

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TABANI’S SCHOOL OF ACCOUNTANCY
FAR-I (CAF – 05) BORROWING COST (IAS-23)
Q.11. QP Limited (QPL) commenced construction of a warehouse on 1 July 2013 and completed the
work on 31 December 2014. In this respect the following information is available:

(i) Prior to commencement of construction, QPL incurred the following expenses:

Rs. in million
Consultants fee 1.45
Preparation of land 0.95
Payment of outstanding government dues for the land 0.60

ii) The agreed contract price is Rs. 70 million. Payments made to the contractor were as follows:

Invoice date Date of Description Net payments(Rs.

payments in million)
1-Jul-2013 16-Jul-2013 10% Advance: (Deductible 7.00
from the progress bills)
30-Sep-2013 16-Oct-2013 1st progress bill 6.00
31-Dec-2013 16-Jan-2014 2nd progress bill 14.00
31-Mar-2014 16-Apr-2014 3rd progress bill 12.00
30-Jun-2014 16-Jul-2014 4th progress bill 10.00
30-Sep-2014 16-Oct-2014 5th progress bill 8.00
31-Dec-2014 16-Jan-2015 Final bill 13.00
70.00

(iii) To finance the project cost, bank loans were acquired as follows:

Description Loan amounts (Rs. Received on Mark-up

in million)
Loan A 30.00 1 July 2013 10%
Loan B 40.00 1 Jan 2014 12%

Mark-up is payable semi-annually on 30 June and 31 December each year. The loans are
repayable in five equal instalments, commencing from 1 January 2016.

(iv) Surplus funds, when available, were invested in short term deposits which provide a return of
8% per annum computed on a daily basis.

(v) The warehouse was available for use on 1 January 2015. Useful life of the warehouse is
estimated at 25 years with no residual value.

Required: Prepare accounting entries for the year ended 30 June 2015 in the books of QPL.
(Ignore taxation. Accounting entries for the year ended 30 June 2014 are not required. Borrowing cost
calculations should be based on 360 days a year basis)
(16)

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