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- August 19, 2017 at 10:32 pm #402522
My Dear Tutor,I have two questions and my question here is that from one example interest earned on investment goes to P/L and for the second example interest earned are deducted from capitalized amount.
1st example)
On October 1 2015 Dawes commenced construction of a manufacturing plant that is expected to take four years to complete.It is being financed entirely by a four-year term loan of $5 million (taken out at the start of the construction).The loan carries fixed interest at 14% per annum and issue costs of 2% (of the loan value) were incurred on the loan .During the year $72000 had been earned from the temporary investment of these borrowings.
solution
interest on $5 million at 14%—————–700000
Amortisation of issue costs using straight-line apportionment(10000/4)—–25000
less interest earned on temporary investment of surplus funds————-(72000)
amount capitalised————————————————————-6530002nd example
Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 april 2016.The loan is redeemable at a premium which means the loan has an effective finance cost of 7.5% per annum.The loan specifically issued to finance the building of the new store which meets the definition of a qualifying asset in IAS23.Construction of the store commenced on 1 may 2016 and it was completed and ready for use on 28 February 2017,but did not open for trading untill 1 april 2017.During the year trading at Apex’s other stores was below expectations so Apex suspended the construction of the new store for a two month period during July and august 2016.The proceeds of the loan were temporarily invested for the month of April 2016 and earned interest of $40000
-capitalised borrowing cost
10*7.5%*8/12=50P/l
40-earned interest
(25)-interest cost
Why we include interest earned on investment in P/Lbut in the first example we deducted 72000 from capitalised borrowing cost?
Need explanation
August 20, 2017 at 6:22 am #402563The interest earned is set off against the interest cost for the same period in which the interest cost is capitalised
During April the interest cost is not capitalised (because construction didn’t start until May) so the interest earned during the period of non construction on the temporary investment goes to statement of profit or loss
OK?
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