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Hello everyone! Could someone solve the problem below. I would like to check my solutions. I am preparing for upcoming exam! Thanks in advance!
On 1 January 2016, PP LLC, raised funds, specifically to finance the construction of a new factory, a qualifying asset as per IAS 23, for $10,000,000 from a bank at interest rate of 8% per annum for 10 years. The entity commenced construction on 1 February 2016 and incurred expenditure of $3,500,000 at the first of each month from February to November 2016, except for September and October 2016, when the entity suspended the construction for two months due to labor strikes and shortage of materials. The building was completed and ready for use on 30 November 2016. The proceeds from specific borrowing were temporarily invested in March 2016 and generated interest income of $18,000.
Required:
Calculate the net borrowing cost that shall be capitalized as part of the cost of the new building and the net finance cost that shall be reported in the statement of profit or loss for the year ended 31 December 2016 (show journal entries).Hi,
If you let me know what it is that you are struggling with in the question then I can help. I presume you have the answer in front of you so it doesn’t make sense for me to explain the entire answer when you have it there.
Thanks
Hello!
Thank you for your response!My calculation is as follows. Could you please, check them and give your comments?
The borrowing cost that will be expensed to P&L = $800,000×4/12 = $266,666.67
The borrowing cost that will be capitalized = ($800,000×8/12)-$18,000 = $515,333.33
The journal entries will be as following:
Credit: Interest payable (SFP) $800,000
Debit: New factory (SFP) $515,333.33
Debit: Interest Income (IS) $18,000
Debit: Interest expense in P&L (IS) $266,666.67Thank you advance!
Hi,
Have you not checked your answer against the answer that you have in front of you? I’d recommend that you do and if you’ve got it 100% correct then there is nothing for me to answer.
If you get some of it wrong and can’t understand why you’ve got it wrong, then let me know and I can help.
Thanks
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