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Apex received a $10 m 6% loan at 1 april 20×7. The loan will be redeemable at a premium which means the loan has an effective finance cost of 7.5% per annum. The loan was specifically issued to finance the building of the new store. Construction of the store commenced on 1 may 20×7 and it was completed and ready for use on 28 february 20×8, but did not open for trading until 1 april 20×8.
This question is in Kaplan kit under chapter IAS 23 borrowing costs
The question asks
How much should be recorded as finance costs in the statement of profit and loss for the year ended 31 March 20×8.
My question is it isn’t related wholly to borrowing costs, this question is a mixture of borrowing cost and some other topic which I don’t know as I havnt covered it yet so can you please tell me which other topic this question is related to?You need to calculate the cost of servicing the loan since 1 April 20X7
Then calculate how much of that service cost qualifies as borrowing costs to be capitalised
Take the capitalisable costs from the overall cost of borrowing and there’s your answer
I’m not sure what you mean by ‘some other topic’
I believe that you can arrive at the correct solution simply by calculating the interest cost relating to the loan
POSSIBLY you are referring to the fact that there is an ‘effective’ rare of interest as well as an actual rate
The effective rate is used to calculate the finance cost but, of course, only the face rate of the debt is actually paid
The difference between effective interest and actual interest is credited to the loan account ready for it to be repaid at a premium sometime in the future
Ok?
I got your point
By “some other topic” I mean this question is related to which topic along with the borrowing cost
I have no idea – maybe just the topic of calculating interest on the effective rate basis?
Hi Sir!
I hope you are doing well. I have the following issues regarding your answer.
Questions regarding your answer
“POSSIBLY you are referring to the fact that there is an ‘effective’ rare of interest as well as an actual rate.”
* What is the actual rate of interest? There is only one rate of interest given in the question. I don’t understand this.
QUERY 2
The effective rate is used to calculate the finance cost but, of course, only the face rate of the debt is actually paid.
* I don’t understand what you mean by only the face rate of the debt being paid. What is the face rate here? 125,000 $ which is going to SPL?
QUERY
* The difference between effective interest and actual interest is credited to the loan account ready for it to be repaid at a premium sometime in the future.
I don’t understand. Can you explain?
I have watched OT lectures on borrowing costs but am still facing difficulties. In this question I don’t understand why we capitalize some of the yearly interest expense but not other two months.
Thank you !
Hi,
There are two rates of interest in the question. The effective rate at 7.5% and the actual rate at 6%. Interest would be expensed at the effective rate of 7.5% so that is the rate that we use when looking at the amount of borrowing costs to be capitalised.
The actual rate can also be referred to as the face rate (but rarely done) as it is the rate showing on the face of the borrowing, i.e. what it says that the borrower is legally required to pay on an annual basis.
Thanks
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