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FAR-I Borrowing Cost IAS-23 Sir MM
FAR-I Borrowing Cost IAS-23 Sir MM
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:
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)
From the desk of Sir Majid Masood Page 2 of 7
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)
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
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.
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.
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:
(iii) To finance the project cost, bank loans were acquired as follows:
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)