Interest capitalization

This topic has 2 replies, 2 voices, and was last updated 8 months ago by Nikitagarwal.

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October 21, 2021 at 2:21 am #638660
Nikitagarwal
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Grimtown took out a $10 million 6% loan on 1 January 20X1 to build a
new football stadium. Not all of the funds were immediately required so
$2 million was invested in 3% bonds until 30 June 20X1.
Construction of the stadium began on 1 February 20X1 and was
completed on 31 December 20X1.
Calculate the amount of interest to be capitalised in respect of the
football stadium as at 31 December 20X1

Ques- How did they calculated the capitalized cost –
I get it 550,000 – 25000 but the interest received was in total of 30,000 and I dont understand why do we have to capitalize 25,000 and leave 5,000 in PL , is it linked to the construction work been done
October 23, 2021 at 9:07 am #638847
P2-D2
Keymaster
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Hi,

Can I please ask where you are getting these questions from? They aren’t from our OT materials and they don’t look familiar to ones usually seen in Kaplan/BPP materials either, so am curious as to where they’re coming from.

Yes, we can only net off the interest received when the conditions of construction are being undertaken and interest is being received from the funds invested. This will be the period of 1 Feb to 30 June. Construction started on 1 Feb and funds were only invested until 30 June, hence $2 million x 3% x 5/12.

Thanks
October 23, 2021 at 4:54 pm #638924
Nikitagarwal
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These are from Kaplan study text.

And thank you for the explanation.
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