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Hello Mr Chris,
Regarding the net borrowing how to calculate for the investment ,i.e from which date,the withdrawing date or the project starting date if the are different.Like in this example from Bpp exam kit,
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Leclerc Co has borrowed $2.4 million to finance the building of a factory. Construction is expected to
take two years. The loan was drawn down on 1 January 20X9 and work began on 1 March 20X9. $1
million of the loan was not utilised until 1 July 20X9 so Leclerc was able to invest it until needed.
Leclerc Co is paying 8% on the loan and can invest surplus funds at 6%.
Calculate the borrowing costs to be capitalised for the year ended 31 December 20X9 in respect of this project.The answer is A
$140,000Thanks,
Hi,
I don’t like to answer a full question without having seen some sore of attempt at it having been made first. If you give the question a go and then let me know where you are struggling then I am more than happy to help.
the key to getting the question right is that capitalisation can only start from when borrowing has been incurred, expenditure is being incurred and construction started, which is usually the latest date.
Thanks and let me know how you get on.
Hi Sir,
I have doubt about the investment of the $1 M will it start from 1st Jan 2019 when they withdrew the money or it should be done from the time of the start of the project which was on 1st mar 20×9,
Thanks
Hi,
We have a $2 million loan from 1 January where interest will be charged at 8% and taken through profit or loss initially.
It is only from 1 March that any interest is capitalised on £1 million at 8% as construction has started. The other $1 million is currently invested from 1 March until 1 July and earns interest at 6%, which reduces the amount being capitalised.
From 1 July onwards the full $2 million is being used on the construction so the full 8% is capitalised for the rest of the year.
Thanks
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