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    Borrowing Cost Drill

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    Jasmin Rabon
    L Co borrowed $5,000,000 at 8% interest to construct a new building. Construction payments were made throughout 2019 and excess funds were invested, earning $150,000 in interest. The amount of capitalizable borrowing cost is $150,000.

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    © All Rights Reserved
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    Borrowing Cost Drill

    Uploaded by

    Jasmin Rabon
    298 views2 pages
    L Co borrowed $5,000,000 at 8% interest to construct a new building. Construction payments were made throughout 2019 and excess funds were invested, earning $150,000 in interest. The amount of capitalizable borrowing cost is $150,000.

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    L Co borrowed $5,000,000 at 8% interest to construct a new building. Construction payments were made throughout 2019 and excess funds were invested, earning $150,000 in interest. The amount of capitalizable borrowing cost is $150,000.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    298 views2 pages

    Borrowing Cost Drill

    Uploaded by

    Jasmin Rabon
    L Co borrowed $5,000,000 at 8% interest to construct a new building. Construction payments were made throughout 2019 and excess funds were invested, earning $150,000 in interest. The amount of capitalizable borrowing cost is $150,000.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Problem 1. On January 1, 2019, L Co. borrowed 5,000,000 to finance the construction of a new building.

    Interest is
    payable on the loan at 8%. Stage payments were due throughout the construction period and therefore excess funds
    were invested during that period. By the end of the project on December 31, 2019, investment income of 150,000 had
    been earned.

    1. What is the amount of capitalizable borrowing cost?

    Problem 2. On January 1, 2019, P Co. had the following borrowings made for general purposes, a part of the proceeds
    was used to finance the construction of a qualifying asset:
    Principal
    12% short-term note 10,000,000
    14% bank loan (3-year) 18,000,000
    16% note payable (5-year) 22,000,000
    The construction of the qualifying asset was started immediately and expenditures incurred on the qualifying asset
    were as follows:
    Jan. 1 4,800,000
    March 30 2,200,000
    July 30 3,500,000
    October 1 5,400,000
    December 31 300,000

    2. What amount of borrowing cost is eligible for capitalization?

    Problem 3. On January 1, 2019, Q Co. contracted for the construction of a building for 20,000,000 on land that it had
    previously purchased. The building was completed on December 31, 2019. The following payments were made to the
    contractor:
    Payment date Amount
    January 1 2,000,000
    March 31 6,000,000
    September 30 10,000,000
    December 31 2,000,000
    The following represents the borrowings of Q Co. as of December 31, 2019:
     10%, 7,000,000, 4-year note dated January 1, 2019 with simple interest payable annually, specifically
    borrowed to finance the construction project. Interest income earned on the temporary investment of the
    proceeds is 120,000.
     12.5%, 10,000,000, 10-year note dated January 1, 2019 with interest payable annually.
     10%, 15,000,000, 10-year note dated December 31, 2018 with interest payable annually.

    1. What is the amount of capitalizable borrowing cost using Average accumulated expenditure method (traditional
    method)?
    2. What is the amount of capitalizable borrowing cost using Avoidable interest method (contemporary method)?

    Problem 4. R Co. started construction of a qualifying asset for S, Inc. on January 1, 2019. The following were
    expenditures incurred on construction.
    Date Expenditures
    January 1, 2019 1,000,000
    May 1, 2019 450,000
    December 1,2019 720,000
    January 1,2020 900,000
    August 31, 2020 300,000
    July 1, 2021 600,000

    R Co. determined the capitalization rate to be 10%. The construction of the qualifying asset was substantially
    completed on September 30, 2021. The building is expected to have useful life of 20 years.

    1. What is the amount of capitalizable borrowing costs in 2020?


    2. What is the total cost of the constructed qualifying asset on September 30, 2021?

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