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Hi, I got this question from study hub.
For which THREE of the following categories of funds used to construct a factory, that is a qualifying asset, can borrowing costs be capitalised?A.Funds borrowed specifically to construct the factory
B.Funds borrowed in advance of expenditure on the factory
C. An overdraft used to help finance working capital
D.General borrowed funds used to finance the building of the factory
E.Funds borrowed that have been applied to the construction of a new officeThe correct answers are A, B and D.
Tutorial note: Borrowing costs must be capitalised when used for the acquisition, construction and production of qualifying assets. Funds in respect of the construction of the new office have already been allocated to that qualifying asset and therefore cannot be allocated to another qualifying asset. The overdraft finances working capital; not the qualifying asset.
My question: How are the funds borrowed in advance of expenditure capitalized since one of the three requirements for commencement of capitalization is expenditure on the asset is being incurred?
Hi,
I think there is subtlety in the question as it specifically states that we are looking at the ‘categories of funds’ and the advanced borrowing are a fund that can be capitalised once the construction/expenditure is being incurred. It is the same with A and D, which still both need the construction/expenditure to be incurred, but will be capitalised once they start.
Thanks
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