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question) Ledger Co has borrowed $4.8 million to finance the building of a factory. Construction is expected to take two years.
The loan was drawn down on 1 January 20X8 and work began on 1 March 20X8. $2 million of the loan was not utilised until 1 July 20X8 ,so Ledger was able to invest it until needed. Ledger Co is paying 8% on the loan and can invest surplus funds at 6%.
The borrowing costs to be capitalised for the year ended 31 December 20X8 in respect of this project will be ?
solution) Borrowing costs March – December ($4.8m × 8% × 10 / 12) = 320,000
Less investment income ($2m × 6% × 4/12) (40,000)
280,000
IN THE SOLUTION, WHY HAVE THEY TAKEN 4/12 MONTHS IN CALCULATION OF INVESTMENT INCOME… ???
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