Hello, need help with this question Which of the following would be qualify as a borrowing cost as defined in IAS 23 Borrowing costs?

1) Premium on redemption of preference share capital 2) Discount in the issue of convertible debt 3) Interest expense calculated using the effective interest rate 4) Finance charges related to finance lease

A. 1, 2 and 3 only B. 2, 3 and 4 only C. 1 and 4 only D. All four

Anwser given is D, but I dont understand how no1 is borrowing cost? Or is it not?

dear sir, please help me with the exercise. i saw your video but i don’t know how to solve it Imperia Ltd has several loans as follows: + The loan is worth $ 1,600,000 from 1/1 / N to 31/12 / N, interest rate of 7% / year. + The loan is worth $ 2,000,000 from 1/1 / N to 31/12 / N + 1, interest rate of 8% / year. + A loan of $ 2,500,000 from 1/1 / N + 2 to 31/12 / N + 2, interest rate of 10% / year. The company intends to use these loans to invest in the construction of a factory with an estimated cost of approximately $ 3,800,000, construction period of 24 months, expected to start from 1/6 / N. Due to unfavorable weather, construction work was delayed to 1/8 / N until 1/8 / N + 2, the production plant was completed and to 1/1 / N + 3 began to be commissioned. into use. The estimated residual liquidation value (after 20 years) is $ 30,000. Requirements: Please apply the relevant international financial statements standards to: a. Determining the time when borrowing costs start to capitalize, the time to stop capitalization and the value of capitalization? Implementing related entries?

Questions for the example: From where do we learn that the investment discontinued in Nov, Dec, or even in the first two months 2019? The question only says that the work stopped at Nov 1?

We cannot capitalise the borrowing costs incurred during the prolonged period of inactivity

We shall still have to pay those borrowing costs – it’s just that they will be debited to finance charges rather than to the capital project itself

Similarly, we can only offset income earned on temporary investment of surplus funds during the same period that we are capitalising the borrowing costs. That income earned in the prolonged period of inactivity will still be earned and credited to Investment Income. But we cannot credit it to the capital project itself

The question says that the amount which can be borrowed from the bank is 300 million but the contract price for the stadium is 350 million. Wont the contract price be included in the calculation instead of the loan amount?

I understood that the borrowing cost should not be capitalized where incurred during extended periods of inactivity, ie., from 1.11.03 to 31.12.03 in the above example. But what about the investment income, why is it getting stopped in the same period. Can you please help me understand this concept? Thank you.

1-1-2008 R co. borrowed $15m to finance the production of 2 assets X and Y which were expected to take a year to build.production started on 1-1-2008 and loan facility was utilized as follows,with the remaining funds invested temporarily.

DATE ASSET-X($m) ASSET-Y($m) 1-1-2008 2.5 5

1-7-2008 2.5 5

The loan rate was 10% and R co. can invest surplus funds at 8%.(ignoring compound interest) calculate the borrowing costs to be capitalized for each of the asset and the cost of each asset as on 31-12-2008

This looks like $400,000 borrowing costs for project X and $800,000 borrowing costs for project Y with asset values of $5,400,000 for X and $10,800,000 for project Y

Borrowing cost would be 10% of 5 million and inventment income would be 8% of 2.5 million for 6 months which gives $400,000

therefore the asset value would be 5.4 million

For Asset Y

Borrowing cost would be 10% of 10 million and investment income would be 8% of 5 million for 6 months which gives $800,000

Therefore the asset value would be 10.8 million

Thank you

ghaityasin1993says

Hi my brother I think borrowing cost for (x) is 150000 $ and borrowing cost for (y) is 300000$ so a total borrowing cost for x and y equal 450000$ at 31/12/2008 so we will say cost of asset at the ending period 2008 for x equal 5150000 (5000000+150000) and for y equal 10300000 (1000000+300000)

HI I was going through this example that Khan produced but i am getting borrowing costs to be $1500 (X-500; Y-1000) and investment income to deduct is coming up to be $300 6 months investment (X-100; Y-200) but watching MIke’s answer it means im still missing something. Please assist ASAP thanks

latifahlatif says

Hello, need help with this question Which of the following would be qualify as a borrowing cost as defined in IAS 23 Borrowing costs?

1) Premium on redemption of preference share capital

2) Discount in the issue of convertible debt

3) Interest expense calculated using the effective interest rate

4) Finance charges related to finance lease

A. 1, 2 and 3 only

B. 2, 3 and 4 only

C. 1 and 4 only

D. All four

Anwser given is D, but I dont understand how no1 is borrowing cost? Or is it not?

emilieduchatelet2u says

very helpful!

lingl says

dear sir, please help me with the exercise. i saw your video but i don’t know how to solve it

Imperia Ltd has several loans as follows:

+ The loan is worth $ 1,600,000 from 1/1 / N to 31/12 / N, interest rate of 7% / year.

+ The loan is worth $ 2,000,000 from 1/1 / N to 31/12 / N + 1, interest rate of 8% / year.

+ A loan of $ 2,500,000 from 1/1 / N + 2 to 31/12 / N + 2, interest rate of 10% / year.

The company intends to use these loans to invest in the construction of a factory with an estimated cost of approximately $ 3,800,000, construction period of 24 months, expected to start from 1/6 / N. Due to unfavorable weather, construction work was delayed to 1/8 / N until 1/8 / N + 2, the production plant was completed and to 1/1 / N + 3 began to be commissioned. into use. The estimated residual liquidation value (after 20 years) is $ 30,000.

Requirements: Please apply the relevant international financial statements standards to:

a. Determining the time when borrowing costs start to capitalize, the time to stop capitalization and the value of capitalization? Implementing related entries?

maxacca says

Questions for the example: From where do we learn that the investment discontinued in Nov, Dec, or even in the first two months 2019? The question only says that the work stopped at Nov 1?

MikeLittle says

It’s the application of the matching principle

We cannot capitalise the borrowing costs incurred during the prolonged period of inactivity

We shall still have to pay those borrowing costs – it’s just that they will be debited to finance charges rather than to the capital project itself

Similarly, we can only offset income earned on temporary investment of surplus funds during the same period that we are capitalising the borrowing costs. That income earned in the prolonged period of inactivity will still be earned and credited to Investment Income. But we cannot credit it to the capital project itself

OK?

maxacca says

understood. Thanks alot!

MikeLittle says

You’re welcome

hungduong says

It hard to understand the lecture

hemraj123 says

Dear Sir,

The question says that the amount which can be borrowed from the bank is 300 million but the contract price for the stadium is 350 million. Wont the contract price be included in the calculation instead of the loan amount?

MikeLittle says

No, the contract price is the amount that will be received upon completion and sale of the stadium

hemraj123 says

Thank you sir. 馃檪

praseena says

Hi Mr. Mike Little,

I understood that the borrowing cost should not be capitalized where incurred during extended periods of inactivity, ie., from 1.11.03 to 31.12.03 in the above example. But what about the investment income, why is it getting stopped in the same period. Can you please help me understand this concept? Thank you.

MikeLittle says

Very simply – it’s the application of the matching concept (F3 lectures!)

Khan says

1-1-2008 R co. borrowed $15m to finance the production of 2 assets X and Y which were expected to take a year to build.production started on 1-1-2008 and loan facility was utilized as follows,with the remaining funds invested temporarily.

DATE ASSET-X($m) ASSET-Y($m)

1-1-2008 2.5 5

1-7-2008 2.5 5

The loan rate was 10% and R co. can invest surplus funds at 8%.(ignoring compound interest) calculate the borrowing costs to be capitalized for each of the asset and the cost of each asset as on 31-12-2008

please must reply

thank you

MikeLittle says

This looks like $400,000 borrowing costs for project X and $800,000 borrowing costs for project Y with asset values of $5,400,000 for X and $10,800,000 for project Y

Did I get it right?

Khan says

I get $375,000 for X

750,000 for Y

And I want know that settle investment income

Thanks

MikeLittle says

And what does the printed solution tell us?

hemraj123 says

Dear sir,

I would like to know if my calculation is correct

For Asset X

Borrowing cost would be 10% of 5 million and inventment income would be 8% of 2.5 million for 6 months which gives $400,000

therefore the asset value would be 5.4 million

For Asset Y

Borrowing cost would be 10% of 10 million and investment income would be 8% of 5 million for 6 months which gives $800,000

Therefore the asset value would be 10.8 million

Thank you

ghaityasin1993 says

Hi my brother I think borrowing cost for (x) is 150000 $ and borrowing cost for (y) is 300000$ so a total borrowing cost for x and y equal 450000$ at 31/12/2008 so we will say cost of asset at the ending period 2008 for x equal 5150000 (5000000+150000) and for y equal 10300000 (1000000+300000)

MikeLittle says

Ghaith, I believe that you are incorrect!

no1lover says

HI I was going through this example that Khan produced but i am getting borrowing costs to be $1500 (X-500; Y-1000) and investment income to deduct is coming up to be $300 6 months investment (X-100; Y-200) but watching MIke’s answer it means im still missing something. Please assist ASAP thanks

no1lover says

figures in $000 btw

MikeLittle says

If we invest $7.5m for 6 months at 8% that will yield $300,000 allocated as $100,000 for project X and $200,000 for project Y

determined016 says

Why no investments for that period …did he remove the funds from the investment?

MikeLittle says

Which period?