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Dear Mike,
Could you please help with below question:
Leclerc has borrowed $2.4 million to finance the building of a factory. Contruction is expected to take two years. The loan was drawn down and incurred on 1 January 20×9 and work began on 1 March 20×9.
$1 million of the loan was not utilized until 1 July 20×9 so Leclerc was able to invest it until needed.
Leclerc is paying 8% on the loan and can invest surplus funds at 6%.
Calculate the borrowing costs to be capitalized for the year ended 31 December 2×9 in respect of the project.Solution:
Borrowing cost March – December (2.4m *8%*10/12) 160000
Less investment income (1M *6% *6/12) (30000)130000
Why is the investment interest for 6 months and not 4 months (from March to 1st July).
Shouldn’t the investment income calculation start from when the project starts?My answer was $140000 as the income was (1M *6% *4/12)
Thanks for your help
Gabriella
I agree with you Gabriella!
What’s more, if BPP are going to include interest from 1 January, why not calculate the interest receivable based on $2.4m from January to end of February and THEN interest on $1 million from March to end of June
I mean, if they’re going to do it wrong, at least be consistently wrong!
My calculation would be exactly the same as yours:
$2.4 million @ 8% for 10 months ($160,000) less
$1 million @ 6% for 4 months ($20,000)
Dear Mike,
Thanks for your help and for the support provided with OT.
It is very frustrating and confusing when “Approved Learning Provider” provide the wrong solution on their book.Best Regards
Gabriella
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