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Leclerc has borrowed $2.4 million to finance the building of a factory. Construction si expected to take two years. The loan was drawn down and incurred on 1 Jaunary 20X9 and work began on 1 March 20X9. $1 million of the loan was not utilised until 1 July 20X9 so Leclerc was able to invest it until needed.
Leclerc is paying 8% on the loan and can invest surplus funds at 6%.Calculate the borrowing costs to be captilised for the year ended 31 December 20X9 in respect of this project.
The following is BPP calculation.
Borrowing costs March – December ($2.4m x 8% x 10/12)…………160000
Less investment income …….($1m x 6% x 6/12)……………………(30000)
——————————————————————————————-130000I am confusing whether I should deduct investement income for six month ($30000) or $20000 for 4 months (as the construction was commenced on 1 March)
Please, help me, Sir!Hi, to the best of my knowledge, it would be just for 4 months.
Maybe BPP know why they’ve dealt with a 6 month period because I don’t
Sorry
Tks so much both of you! This is exactly what I am going to ask! One more reason why I really hate the quality of BPP revision kits!
i love it when the big boys are wrong! … i wasted an hour mulling over this question!!!
Sir I dont understand why it is 4 months as the loan was invested in July.
is it march to July or July to DecemberNo, the surplus money was invested on 1 January but the project started only on 1 March and then used on 1 July so it was invested for just the 4 months whilst project work was in progress (March to end June)
just a rework of this problem:
Leclerc has borrowed $2.4 million to finance the building of a factory. Construction si expected to take two years. The loan was drawn down and incurred on 1 Jaunary 20X9 and work began on 1 March 20X9. $1 million of the loan was not utilised until 1 July 20X9 so Leclerc was able to invest it until needed.
Leclerc is paying 8% on the loan and can invest surplus funds at 6%.Calculate the borrowing costs to be captilised for the year ended 31 December 20X9 in respect of this project.
———————————-
my working:
loan: 1400 x 8% x 4/12 = 37.33 (4 months Mar-Jun)
loan: 2400 x 8% x 6/12 = 96.00 (6 mts Jul-Dec)
invst: 1000 x 6% x 4/12 = (20) (4 mts mar-jun)
total ———————– = 113.33———————————————————-
is this correct?
No! It’s 10 months at 8% on 2,400 less 4 months at 6% on 1,000
That’s 160,000 less 20,000 = a total of 140,000
Ok?
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