Borrowing cost

"Please someone explain for me in this question" - you've posted this on the Ask ACCA Tutor page so presumably the "someone" in your last line is me! If I have a $1 million loan facility and I draw it down on 1 March but only spend so much of it as I need, then I may invest the amount surplus to immediate requirements and earn a bit of interest The question as you have typed it is unanswerable! You haven't given me 2 vital pieces of information ..... namely the interest rate on borrowed funds and also the interest rate that I can earn on the temporarily re-invested surplus. All this is covered in the course notes and in the lectures! Have you read the notes and worked through the example there?

Sorry sir! I've totally fogort the key point was the rate of borrowing cost and investment income, thank you for ur guideline, i've already solved this question I want to ask you in another question that seems misunderstood about the period of time "Korinth plc has borrowed $2.4m to finance the construction of a qualifying asset. Work on construction is sheduled to last for three years. The loan was drawn down on 1 may 2014 and construction work commenced on 30 june 2014 $1m of the funds was not required until 1 november 2014 so Korinth plc invested the money until it was needed Korinth has borrowed the money at the rate of 8% and can earn 6% on temporary investments How munch are the borrowing costs to be capitalised by Korinth plc for the year ended 30 april 2015?" I've saw your guideline at the bottom but as my calculation, the investment income = (1,000,000 * 0.06 * 6/12) = 30,000 (the period of interest income is 6 months, from 01.11.14 - 30.04.15 - is that right?) And yours is 4 months (???) Can you explain for me? Seems like i misunderstood at somewhere?

The investment income set-off period is the same as the capitalisation period. ie the period applicable for the reduction of the capitalised borrowing costs is limited to the investment income earned during the period that the interest expense is capitalisable In your example we must capitalise interest expense during the period of work activity and that is with effect from 30 June, 2014 so investment income set-off is calculated with effect from 1 July, 2014 The $1 million was needed on 1 November so the investment period ceased on 31 October, 2014 On my fingers that adds up to 4 months (J, A, S and O) OK?

Got it sir!!!! Thank you for your kindness Please help me in another thing sir!!! :) "Tibet acquired a new office building on 01.10.2014. Its CV consisted of Land = $ 2,000,000 Building structure = $ 10,000,000 Air conditioning system = $ 4,000,000 The estimated lives of the building structure and air conditioning system are 25 years and 10 years respectively. When the air conditioning system is due for replacement, it's estimated that the old system will be dismantled and sold for $ 500,000. Depreciation is time apportioned where appropriate At what amount will the office building be shown in Tibet's statement of financial position as at 31.03.2015 ???" As my understanding, the dismantled cost = $500,000 was included in the cost of the air conditioning, therefore when we calculate the depreciation of the air conditioning, should we use $ 4,000,000 or $ 3,500,000 ? I saw the answer but don't understand why they had used both of 2 figures 4,000,000 - (3,500,000/10 x 6/12)

I believe the accounting entry for acquisition of building including cost of air conditioning is: DR Air conditioning 4,000,000 Cr Cash 3,500,000 Cr Provision for air conditioning dismantled 500,000 So the cost as known as depreciable amount of air conditioning is 4,000,000 ? Is my understanding right?

"I believe the accounting entry for acquisition of building including cost of air conditioning is: DR Air conditioning 4,000,000 Cr Cash 3,500,000 Cr Provision for air conditioning dismantled 500,000" NO! The double entry for the acquisition of the air conditioning unit is: Dr PPE $4m Cr Cash $4m Depreciation is calculated on the amount to be written off over 10 years and that is $4m - residual value of $500,000 So $3,500,000 written off over ten years for half a year in the year of acquisition is $175,000 Now, if that's the depreciation, then the carrying value of the air conditioning must be $4,000,000 - $175,000 = $3,825,000 Now look at what you posted! "I saw the answer but don’t understand why they had used both of 2 figures 4,000,000 – (3,500,000/10 x 6/12)" What is the value of "(3,500,000/10 x 6/12)"? I believe that it's the same value as the one I calculated here: "So $3,500,000 written off over ten years for half a year in the year of acquisition is $175,000" Does that do it for you?

@mikelittle said: "I believe the accounting entry for acquisition of building including cost of air conditioning is: DR Air conditioning 4,000,000 Cr Cash 3,500,000 Cr Provision for air conditioning dismantled 500,000" NO! The double entry for the acquisition of the air conditioning unit is: Dr PPE $4m Cr Cash $4m Depreciation is calculated on the amount to be written off over 10 years and that is $4m - residual value of $500,000 So $3,500,000 written off over ten years for half a year in the year of acquisition is $175,000 Now, if that's the depreciation, then the carrying value of the air conditioning must be $4,000,000 - $175,000 = $3,825,000 Now look at what you posted! "I saw the answer but don’t understand why they had used both of 2 figures 4,000,000 – (3,500,000/10 x 6/12)" What is the value of "(3,500,000/10 x 6/12)"? I believe that it's the same value as the one I calculated here: "So $3,500,000 written off over ten years for half a year in the year of acquisition is $175,000" Does that do it for you?

Oh my god! i've completely misunderstood the idea of this "When the air conditioning system is due for replacement, it’s estimated that the old system will be dismantled and sold for $ 500,000", it indicates the residual value but I think too complicated and only think of dismantled cost, thank you very much (oh my god i'm so dumb)

No, not SO dumb :-) Don't worry about it! We all make mistakes and it's better to make them here than in the exam room

Dear sir, I have another inquirie about the IAS20- government grants As we know if we is granted by monetary from goverment to acquire an asset, then we have two methods to deal with it, one is reducing cost of the asset and the other one is puting it in deffered income, thereafter amortise it over the useful life of the asset So i was wondering about reclassification of deffered income, initially it belongs non current liability (is that correct?), and after that its amortised proportion is under current liability? For example we will amortise deferred income of 10,000 over 10 years, so at the closing of financial year 1, we will classify of 8,000 under non current liability and 1,000 under current liability and then amortise for 1,000 during financial year 2 Is my understanding correct?

Yes, I suppose you are correct. I've never thought about splitting the liability

Dear sir, How can IAS 36- impairment loss practice question don't have the answers? I have been stucking at questiong 3 of that section Please help me out of that, sir!!! "Methoni plc owns a machine that has a CV of $ 97,000 as at last year end 28 feb 2015 and an estimated remaining useful life at that date of 40 months after which it could be scrapped for $ 10,000. The directors of Methoni plc are concerned that the machine may be impaired so, on 30 june 2015, the directors carried out research and have produced the following: Methoni plc cost of capital is 8% which is some 1.5% lower than when it was las computed ( i don't know what 1.5% is for?) The asset has a market value on an arm's length basis of $ 92,450 and would involve the company having to dismantle the machine and deliver it to a purchaser at an estimated cost of $ 4,750 A new machine with an estimated 5 year life would cost $ 175,000 If Methoni plc keeps the machine, the directors believe that it will generate net annual cash flows of $ 30,000 for three years What is the value of the impairment loss that the Methoni plc directors should account for?" My answer is CV as at 28/02/2015 = 97,000 Depreciation 4 months (01/03/2015 - 30/06/2015) (97,000 - 10,000)/40 x 4 = 8,700 -> CV as at date of impairment testing (97,000 - 8,700) = 88,300 FVLC (92,450 - 4,750) = 87,700 VIU (30,000 x (1/1.08 + 1/1.08^2 + 1/1.08^3) ~ 77,313 (determining by discounted cash flows - can you guide me clearly about this method ) -> Recoverable amount is higher of FVLC and VIU = 87,700 CV > RA -> impairment loss = 88,300 - 87,700 = 600 -> wrong answer right? Please help me understand discounted cash flows and guide me this exercise

I already have made a note to myself to change the figure from $92,450 to $93,450 Now try it :-)

I think my answer is no impairment of that asset becuz RA (88,700)> CV(88,300)

So, try clicking on "zero" and see whether that's correct

Thank you sir!!! But what about 1.5% stand for? And my calculation of discounted cashflows is correct?

1.5% is there as a distraction and you are correct to ignore it Yes, your principles in the discounting of the annual flow are correctly applied

@mikelittle said: 1.5% is there as a distraction and you are correct to ignore it Yes, your principles in the discounting of the annual flow are correctly applied

Thank you very much sir

You're welcome

Dear sir, I have a question relating to IAS 17 - lease For example we have a finance lease payment of 360,000 on 01/01/x6 Lease installments were 120,000 for immediate deposit on that date and 3 further of 100,000 each on the end of the year x6,x7 and x8 i break these down in double entry 01/01/x6 Dr finance lease obligation 120,000 Cr bank 120,000 31/12/x6 1/ Dr interest exp 28,800 Cr interest payable 28,800 2/ Dr finance lease obligation 71,200 ( where this figure come from? - principal amount of current year? What about 120,000? Or total principal of current year is 191,200?) Dr interest payable 28,800 Cr bank 100,000

This question has nothing to do with borrowing costs - it would have been much preferable for you to open a new thread! Am I to assume that this is another question where you're making me guess some crucial piece of information? Ok, you tease, let me guess that the implicit rate of interest is 12%. Am I correct? In addition, where you have posted "we have a finance lease payment of 360,000 on 01/01/x6" you actually mean that "we have entered into a finance lease on 1 January, 20X6 to acquire an asset that had a cash price of $360,000" - am I close with that one too? Next question - have your read the course notes and watched the lectures? I shall assume that you have - otherwise I shall be very upset! So here goes ...... 1 January, 20X6 Dr Asset $360,000 Cr OUFLA/c $360,000 Dr OUFLA/c $120,000 Cr Cash $120,000 31 December, 20X6 Dr Finance Lease Interest $28,800 Cr OUFLA/c $28,800 Dr OUFLA/c $100,000 Cr Cash $100,000 31 December, 20X7 Dr Finance Lease Interest $20,256 Cr OUFLA/c $20,256 Dr OUFLA/c $100,000 Cr Cash $100,000 31 December, 20X8 Dr Finance Lease Interest $10,944 (rounded) Cr OUFLA/c $10,944 Dr OUFLA/c $100,000 Cr Cash $100,000 Follow that through and, if there is any lingering question, post again

Sorry for omission, sir!!! I will create a new one for another issues Ok this is the last question posted here What am trying to understand is that 100,000 includes a interest of 28,800 and a principal of 71,200 ??? Is a principal of 20x6 or 20x7???

The payment of $100,000 on 31 December, 20X6 pays off the $28,800 interest accrued since 1 January, 20X6 and the balance of the $100,000 pays $71,200 principal debt

Is 71,200 a principal for 20x6 or 20x7 sir??? i think it's a principal of 20x6 because paying of 100,000 in arrear therefore it cannot pay for a principal of next year Total principal paid in 20x6 is 191,200

My previous post "The payment of $100,000 on 31 December, 20X6 pays off the $28,800 interest accrued since 1 January, 20X6 and the balance of the $100,000 pays $71,200 principal debt" surely made that clear! This is a finance lease contract with instalment payments in arrears. How can a payment on 31 December possibly be paying for interest accrued since 1 January, 20X6 and principal for 20X7? That simply does not make any sense at all And, yes, in a cash flow question, the amounts paid to Finance Lease Creditors as shown in the Financing Activities section of the cash flow would show $191,200

Thank you very much sir!!! You helped me a lot!!!

You're welcome