Borrowing cost

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

i dont know how to solve pls explain

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 20x7 Year ending - 31 Dec 20x7 Borrowing cost capitalization - 9 months annual loan interest ($3,000,000 x 9%) = $270,000 loan interest expensed (5/12 x $270,000) = $112,500 Borrowing cost capitalization = $157,500 Hopefully a tutor can confirmed that i am correct......

I don't think that the answer is correct. You need to look at the amount of interest capitalised net of any loan interest received on the temporary investment of funds. We invested $1m at 7% for a few months too. Thanks