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Apex received a $10 million 6% loan on 1 April 20X7. The loan will be redeemable at a premium
which means the loan has an effective finance cost of 7.5% per annum. The loan was specifically
issued to finance the building of a new store.
Construction of the store commenced on 1 May 20X7 and it was completed and ready for use on
28 February 20X8, but did not open for trading until 1 April 20X8.ANS
Apex decided that not all of the funds raised were needed immediately and temporarily
invested some of the funds in April 20X7, earning $40,000 interest.
How should the $40,000 be accounted for in the financial statements of Apex?
A Net off the amount capitalised in property, plant and equipment
B Taken to the statement of profit or loss as investment income
C Taken as other comprehensive income
D Deducted from the outstanding loan amount in the statement of financial positionans is B
250
ans
B
Temporary investment income earned during the construction period should be netted off
the amount capitalised. However, the interest was earned prior to the period of
construction. Therefore the investment income earned should be taken to the statement of
profit or loss as investment incomeI have a doubt as construction started on 1 may which is after 1 April 2017 so the interest is earned after the period of construction.
Can you please explain how they have calculated and the reason for B being the answer?
you help and feedback will be appreciated.The answer is correct as the interest was earned in the month of April, i.e. before the construction commenced in May. As soon as the construction starts in May, any interest earned would be net-off against the interest capitalised.
Thanks
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