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Hello Sir
Please I need help with this question.Capital had the following bank loans outstanding during the whole of 20×8.
9% loan repayable 20×9
11% loan repayable 20y2
capital began construction of a qualifying asset on 1 April 20×8 and withdrew funds of $6 million on that date to fund construction. On 1 August 20×8 an additional $2 million was withdrawn for the same purpose.
calculate the borrowing costs which can be capitalized in respect of this project for the ended 31 December 20×8.A- $ 560 000
B- $ 472 500
C- $ 750 000
D- $ 350 000Don’t think that you have given me full information here!
Where is the question from? and
How much are the two loans borrowed?
I keep checking for the missing information in a reply from you but you appear to have lost interest!
Ok, in the absence of any response from you and therefore for the benefit of others, I’m going to make some figures up for the values of the two loans.
The first (9% repayable in 2009) is, say, $15 million and the second (11% repayable in 2012) is $25 million giving a total amount borrowed of $40 million
There are (at least) two ways of arriving at the solution.
For a full year 9% of $15 million is $1,350,000 and 11% of $25 million is $2,750,000. So interest for a full year on the combined borrowings is $4,100,000
So interest for 9 months on the $6,000,000 borrowed is 9/12 x $4,100,000 x 6,000,000/40,000,000 = $461,250 and interest for 5 months on the $2,000,000 borrowed is
5/12 x $4,100,000 x 2,000,000/40,000,000 = $85,417Total capitalisable borrowing costs are therefore $546,666
The alternative way of calculating the amount is:
$6,000,000 x 9/12 x 9% x 15,000,000/40,000,000 = $151,875
$6,000,000 x 9/12 x 11% x 25,000,000/40,000,000 = $309,375
$2,000,000 x 5/12 x 9% x 15,000,000/40,000,000 = $28,125
$2,000,000 x 5/12 x 11% x 25,000,000/40,000,000 = $57,292Giving a total of $546,668
Ok?
Thanks for your very detailed answers!
One more question, I see obviously that we need to calculate the average capitalisation rate for the first way which equal 4,100,000/40,000,000.
But I find not clear why we have to calculate the average.
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