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On 1 October 20X1 Bash Co borrowed $6m for a term of one year, exclusively to finance the construction of a new piece of production equipment. The interest rate on the loan is 6% and is payable on maturity of the loan.
The construction commenced on 1 November 20X1 but no construction took place between 1 December 20X1 to 31 January 20X2 due to employees taking industrial action. The asset was available for use on 30 September 20X2 having a construction cost of $6m.
What is the carrying amount of the production equipment in Bash Co’s statement of financial position as at 30 September 20X2?answer
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Production cost of PPE 6,000Capitalisation of borrowing costs: $6m x 6% x 9/12 = 270
Total cost capitalised (and carrying amount) at 30 September 20X2 = 6,270
sir, why are we taking 9 months can you explain?
Hi,
Yes, I can. The criteria for capitalisation were met on 1 November 20X1 and the reporting date is 30 September 20X2, which is a period of 11 months. However, there was no construction between 1 December 20X1 and 31 January 20X2, which is a period of 2 months where we cannot capitalise the borrowing costs. If you net these off then 11 less 2 is the 9 months of the year where we have been able to capitalise the borrowing costs.
Thanks
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