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On January 1 2016, Stremats Co. borrowed $1.5m to finance the production of two assets both of which were expected to take a year to build. Work started during 2016. The loan facility was drawn down and incured on 1st January 2016 and was utilised as follows, with the remaining funds invested temporarily.
Asset A. Asset B
$000. $000
1 Jan 2016. 250. 500
1 July 2016. 250. 500
Total 500. 1000The loan rate was 9% and Stremats Co. can invest the surplus funds at 7%.
Required:
Ignoring compound interest, calculate the borrowing cost which may be capitalised for each of the assets and consequently the cost of each asset at 31st December 2016.
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