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Hi Tutor , I have question which has been taken from past paper 3 June 2015.
Cyclip ( i just show S co that is why i did not wite here P co because question relating to only Sco not Pco)
profit for the year(31 March 2015)-2400
Finance cost (300)On 1 April 2014, Cyclip commenced the construction of a new production facility, financing this by a bank loan.Cyclip has followed the local GAAP in the country where it operates which prohibits the capitalisation of interest. Bycomb(Parent CO) has calculated that, in accordance with IAS 23 borrowing costs, interest of $100,000 (which accrued evenly throught the year) would have been capitalised at 31 march 2015.The production facility is still under construction as at 31 MArch 2015.
In the aswer note:
The profit for the year for CYClip would be increased by $100,000 due to interest capitalised.In accordance with IAS 23 borrowing costs.Alternatively, this could have been calculated as :2400+100=2500
My question why they added 100 over 2400?
When they recognised this interest as revenue they also deducted it from 300(finance cost) they gave its explanation like that; ”The interest capitalised in accordance with IAS 23 of $100,000 would reduce the finance cost of CYClip for consolidation purposes”Could you please Explain it?
“Cyclip has followed the local GAAP in the country where it operates which prohibits the capitalisation of interest”
If the local rules prevent capitalisation, the interest cost must have been expensed and therefore that $100,000 has been deducted in arriving at the profit for the year of $2,400,000
But if we had capitalised it, the finance cost would have been reduced (because that $100,000 would be capitalised as an asset and not treated as an expense)
So istead of deducting $300,000 finance costs in arriving at $2,400,000 profit for the year, we would only have deducted $200,000 and that would have given us a $2,500,000 profit for the year
Is that better?
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