borrowing cost (mock exam mcq)

Q:
In the context of borrowing costs, the following information is relevant. How much borrowing costs must be capitalised?

A company arranged on 28feb,2011 to borrow $20m funds at the rate of 6% to finance the dev of a qualifying asset. Planning and architecture’s fees cost $500,000 and were paid out of general cash resources on 31 March 2011. Work commenced on 3 April and the first trance of money $ 6m was drawn down on 30 April 2011. Of this amount, $4m was spent immediately and the remaining $2m was invested at the rate of 4% pa until it was spent on 1 july together with $10m of the second and final tranche of $14m, the balance invested at 4% pa

Work was halted on 31 Aug by industrial action and was not recommenced until 1 October. on 30 nov, the investment was cashed in and the final $4m spent. The asset was completed on 1 feb 2012

a) $ 680,000
b) $ 660,000
c) $ 593,333
d) nil, it is available for the company to choose to expense the total borrowing cost

ANSWER

Borrowing 6%
1/3 20m
work commence on 3/4

1/5 6m drawn for this project
1/7 16m (10+6)

Investment 4%
1/5 2m (spent 4m)
1/7
Expense
1/4 0.5m (paid out of general cash irrelevant)

er…i don’t actually understand what does it mean..any help would be appreciated