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Lerclec has borrowed $2.4 million to finance the building of a factory. Construction is expected to take two years. The loan was drawn down and incurred on 1 January20X9 and work began on 1 March 20X9. $1 million of the loan was not utilised until 1 July 20X9 so Lerclec was able to invest it until needed.
Lerclec is paying 8% on the loan and can invest surplus fund at 6%.
Calculate the borrowing costs to be capitalised for the year end 31 December 20X9 in respect of this project
A $132,000
B $192,000
C $100,000
D $162,000The answer is A but I still don’t get it. They take the borrowing costs from March to December but temporary investment income from January to July.
To the best of my knowledge, borrowing costs and temporary investment income should starts at the same time, i.e. : temp investment income from March to July and borrowing costs from March to December
Please explain this to me. Thanks !
Please don’t hold me to account for BPP answers.
I would agree with you and calculate interest received only from March. I seem to remember a similar situation in an F7 exam from some time ago and in the answer the examiner calculated interest received only with effect from the same date that borrowing costs were calculated
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