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... ???
Ask the Tutor ACCA FR
ch= borrowing costs
3y ago#1Hi,
The 4/12 relates to the period from 1 March to 1 July (4 months) where the funds from borrowing were invested and we received the interest income. This is then net off the borrowing costs that are capitalised.
Thanks
Sign into reply to this topic.