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Orinoco borrowed $3m at 9% to finance construction of a factory on 1 May 20X7. Work on the project began on 1 June 20X7. $1m of the loan was not required to be spent until 1 September 20X7, so was reinvested until then at 7%.
What amount of borrowing costs should be capitalised for the year to 31 December 20X7?
A.$140,000
B.$156,667
C.$157,500
D.$180,000
Hi,
I can help you with the answer to the question but I’d need to see you having attempted it first so that I can then explain where you’ve gone wrong and can then help you with your understanding.
Look forward to hearing back from you.
Thanks
You can at least attempt it and then I can help you with it. You should look at how much interest is incurred by borrowing and then look at how much can be capitalised. You then need to look at the interest income received on the investment of the funds, as this can then be net against what is capitalised.
Orinoco borrowed $3m at 9% to finance construction of a factory on 1 May 20X7. Work on the project began on 1 June 20X7. $1m of the loan was not required to be spent until 1 September 20X7, so was reinvested until then at 7%.
What amount of borrowing costs should be capitalised for the year to 31 December 20X7?
A.$140,000
B.$156,667
C.$157,500 (This is the Answer)
D.$180,000
Loan – $3,000,000
Effective Interest rate – 9%
Start of construction – 1 June 20×7
Year ending – 31 Dec 20×7
Borrowing cost capitalization – 9 monthsannual loan interest ($3,000,000 x 9%) = $270,000
loan interest expensed (5/12 x $270,000) = $112,500
Borrowing cost capitalization = $157,500Hopefully a tutor can confirmed that i am correct……
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