Builder Co is constructing a new office building. It capitalises finance costs in accordance with IAS 23. Its total borrowing costs during the period were $1m. Construction took place although the year except for a 6 week period when there was a labor strike, a one week shut down for Christmas. Surplus fund from the loans to finance construction generated finance income of $200,000. What should be added to the assets value in the year?
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borrowing cost IAS 23
10y ago#1You tell me what you think it should be and tell me what the printed solution says and I'll tell you why and where you've gone wrong
(Is "although" meant to be "all through"?
The borrowing costs start to capitalise at later of the start of construction and the date of borrowing incurred
Construction took place all through the year therefore we can use total borrowing costs during the period were $1m for capitalisation except for a suspension during 7 weeks (6 weeks of an accident and 1 week of chrismast holiday)
-> Capitalisation of 5 months - interest temporary investment = $1,000,000 x 5 /12 - $ 200,000 = 216,667
Is that correct sir?
10y ago#3We need to know when the loan was borrowed - was it at the start of the year
We ned to know how long is the year! It may say in the question that the "year" is to be taken as 50 weeks
"Capitalisation of 5 months" - I don't understand why you have reduced the period to 5 months
I believe that the answer should be .....
..... however long the year is (say 50) - 7 weeks / 50 * (1,000,000 - 200,000)
so 43 / 50 * $800,000 = $688,000
It's possible that the Christmas week is not taken as an acknowledged stoppage so then the calculation would be as above but with 44 substituted in place of 43 giving:
44 / 50 * $800,000 = $704,000
Equally, the year could be taken as 52 weeks if there is no contrary instruction in the question in which case the two answers above would become:
43 / 52 * $800,000 = $661,538
44 / 52 * $800,000 = $676,923
Without the full question in front of me ..... take your pick
Sorry i had misunderstood with 7 months and calculated based on months
It was such a big mistake,
"The borrowing costs start to capitalise at later of the start of construction and the date of borrowing incurred"
I wrote it down just want to recap for memorizing the principles
As per the question,I think it kept silent that means we can assume the loan was borrowed at start of the year
Thank you for your help sir,
10y ago#5You're welcome - but do try to avoid such huge mistakes in the exam room!
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