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The question has been taken from study question bank page number 16
Hi Mr Mike, I have question.
On October 1 2015 Dawes commenced construction of a manufacturing plant that is expected to take 4 years to complete.It is being financed entirely by a four-year term loan of $5 million (taken out at the start of the consturction).The loan carries fixed interest at 14 % per annum and issue cost 2%(of the loan value) were incurred on the loan.During the year $72000 has been earned from the temporary investment of these borrowings
Note:Use the straight-line method to amortise issue cost
Interest on 5 million at 14%-700——understood this part
Amotisation of issue costs using straight line depreciation
5 million *2%=100/4 years=25 25(could you explain this part?
Less interest earned on temporary investment of surplus funds-(72)—understood this part.amount of borrowings cost to be capitalised-653
Why we amortise issue cost(100/4=25) and add it over capitalised finance cost (700)?
Usually, investment income(if company wants to invest somewhere to get investment income and we deduct it from capitalised borrowing cost) deducted from borrowing costs will to get capitalised borrowing cost.
The question has been taken from Becker study question bank page number 16
“Amotisation of issue costs using straight line depreciation
5 million *2%=100/4 years=25 25(could you explain this part?”What is there to explain? The issue costs are $100,000 and are to be written off straight line over 4 years
$100,000 / 4 = $25,000 expense to the statement of profit or loss
Interest at 14% on $5,000,000 = $700,000 (Correct)
“amount of borrowings cost to be capitalised-653”
Is this you saying that interest is $700,000 (this is an amount to be capitalised instead of being expensed this year) + $25,000 (this is an amount to be expensed this year and not capitalised) – $72,000 (this is an income from temporary investment of surplus funds and is deducted from the $700,000
Therefore net amount to capitalise is $628,000 with the other $25,000 being expensed through statement of profit or loss
NB It’s no good telling me where this is from – I have very little material to hand that I can refer to!
OK?
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