Borrowing Cost Answer
Let’s Check (ULO o)
Activity 1. Now that you know most of the essential terms in the study of
accounting for borrowing costs, let us try to check your understanding of the topic.
True or False: Write true if
wrong, write false.
the statement is correct and if the statement is
________1. Borrowing costs are incurred in connection with borrowing of funds and
include all of the following:
a. Interest expense calculated using the effective interest method.
b. Finance charge in respect of finance lease.
c. Exchange difference arising from foreign currency borrowing to the extent
that the exchange difference is regarded as an adjustment to interest costs.
d. All of these are included in borrowing costs.
___True___2. If the qualifying asset is financed by specific borrowing, the
capitalizable borrowing cost is equal to actual borrowing cost incurred up to
completion of asset minus any investment income from the temporary investment
of the borrowing.
_False____3. If the qualifying asset is financed by general borrowing, the
capitalizable borrowing cost is equal to average expenditures on the asset
multiplied by a capitalization rate or actual borrowing cost incurred, whichever is
higher.
_False___4. Inventory that is manufactured or produced in large quantity on a
repetitive basis and takes a substantial period of time to get ready for use or sale
could be treated as qualifying asset for the purpose of capitalizing borrowing costs.
___False__5. Borrowing costs can be capitalized when the asset is a qualifying asset
and it is probable that the borrowing costs will result in future economic benefit to
the entity but the costs cannot be measured reliably.
_False_____6. All of the following should be considered a qualifying asset:
a. A power generation plant that normally takes two years to construct.
b. An expensive jet that can be purchased from a vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.
__False__7. Cessation of capitalisation is provided for in IAS 23 par. 20
_True____8. The IAS 23 on borrowing cost does not deal with actual or imputed cost
of equity including preferred capital, not classified as a liability.
_False___9. An entity is required to apply the standard on borrowing cost to a
qualifying asset measured at fair value, for example a biological asset within the
scope of IAS 41.
__False__ 10. Paragraph 20 of IAS 23 provides that during extended period where
companies suspend active developments of a qualifying asset, it shall continue the
capitalisation of borrowing cost.
Let’s Analyze (ULO m)
Answer the following adapted problems:
Activity 1. Getting acquainted with the essentials in computing and accounting
treatment of borrowing costs, what also matters is you should also be able to solve
and analyze problems on borrowing costs. Now, I will require you to answer this
problem.
Problem 2 (Adapted C. Valix, J. Peralta, C. Valix 2017 page 1169
Mildred Company borrowed 5,200,000 on a 10% note payable to finance a new
warehouse which the entity is constructing for own use. The only other debt of the
entity is a 7,800,000, 12% mortgage payable on an office building. At the end of
the current year, average accumulated expenditures on the new warehouse totalled
6,175,000.
What amount of interest should be capitalized for the current year?
a. 520,000
b. 617,500
c. 637,000
d. 679,250
Problem 2.(Adapted C. Valix, J. Peralta, C. Valix 2017 page 1163)
On January 1, 2017, Sheena Company borrowed 2,800,000 at an interest rate of
12% specifically for the construction of a new building.
The actual interest cost on this specific borrowing was 336,000 but interest of
14,000 was earned from the temporary investment of the borrowing proceeds.
Sheena company also had the following other loans in 2017 for general purposes
but the proceeds were used in part for the construction of the building.
10% bank loan
12% long term loan
Principal
4,200,000
7,000,000
Interest
420,000
840,000
The construction began on January 1, 2017 and was completed on December 31,
2017. The expenditures on the construction were 2,800,000 on Jan. 1, 1,400,000
on March 31 and 4,200,000 on Sept.30.
Required: Compute the cost of the new building.
336,000-14000=
322,000
2800*12
=33,600,000
1,400,000*9
=12,600,000
4200,000*3
=12600,000
58,800,000/12=4900,000-2800,000=2100,000*.1125=236,250
1,260,000/11,200,000=.1125
= 2,800,000+1,400,000+4,200,000+ 322,000+ 236,250=8,958,250
Problem 3.(Adapted C. Valix, J. Peralta, C. Valix 2017 page 1163)Milott
Company had the following borrowings during 2017. The borrowings were made
for general purposes but the proceeds were used to finance the construction of a
new building.
12% bank loan
14% long term loan
Principal
3,900,000
6,500,000
Interest
468,000
910,000
The construction began on January 1, 2017 and was completed on Dec. 31, 2017.
Expenditures on the building were 2600,000 on June 30 and 1,300,000 on
December 31.
Required: Compute the cost of the building.
1378000/10,400,000
2600*6
=
1300*
=0
=
13.25 *
15,600,000/12
=
1300,000
=
172,250
1300,000
Answer= 172,250+2600,000+1300,000=4,072,250
Problem 4.(Adapted C. Valix, J. Peralta, C. Valix 2017 page 1164)
Jewelry Company had the following outstanding loans during 2017 and 2018.
Specific construction loan
3,600,000
10%
General loan
30,000,000
12%
The entity began the self-construction of a new building on January 1, 2017 and the
building was completed on June 30, 2018. The following expenditures were made:
January 1, 2017
April 1, 2017
December 1, 2017
March 1, 2018
4,800,000
6,000,000
3,600,000
7,200,000
Required: Compute for the cost of the building on December 31, 2017 and on June
30, 2018.
1. December 31, 2017
=
14400,000+ 1,080,000=15,480,000
4800*12
=
57600,000
6000*9
=
54,000,000
SB
3600,000*.10=360,000
3600*1
=
3600,000
115,200,000 /12= 9600,000
- 3600,000
=6000,000*.12 =
720,000
1,080,000
2. June 30, 2018
15,480,000*6/6
7200,000*4/6
=
15480,000+7,200,000+1,180,800=23,860,800
=15,4800,000
=
4800,000
20,280,0003600,000=16,680,000*.12=2,001,600*6/12=1000,800
SBC .10 *3600,000*6/12
=
180,000
1180,800
Problem 5.(Adapted C. Valix, J. Peralta, C. Valix 2017 page 1164)Macy
company had the following loans outstanding for the entire year 2017.
Specific construction loan
2,000,000
10%
General Loan
40,000,000
12%
The entity began the self construction of a building on January 1, 2017 and the
building was completed on Dec.31, 2017. The following expenditures were
made during the current year.
January 1
2,000,000
July 1
4,000,000
November 1
6,000,000
Total
12,000,000
Required: Compute the cost the new building.
2000*12 =
24,000,000
4,000*6 =
24,000,000
6000*2 =
12,000,00 =
60,000,000/12=5,000,000
(2000,000)
=3,000,000*.12=360,000+200,
000
= 560,000
+12,000,000
12,560,000
Intangible Assets Answer key
Let’s Check (ULO a&b)
Answer the following adapted problems:
1. An intangible asset is defined as a non monetary asset without physical
substance. (True or False) True
2. All of the following should be capitalized as cost of trademark.
a. Cost of successful litigation of the trademark
b. Registration with Intellectual property code
c. Design cost
d. Legal fee
Answer: False
3. When an entity develops a trademark, the costs directly related to securing it
should generally be capitalized. All of the following costs associated with a
trademark should be capitalized. (True or False)
a. Attorney fees
b. Consulting fees
c. Research and development fees
d. Design costs
4. A trademark is an example of which general category of intangible asset?
Market Related
5. When a patent is amortized, the credit is usually made to the patent account.
True
6. When an entity successfully defended a patent from infringement by a
competitor, the cost of successful litigation should be charged to patent and
amortized over the remaining useful life of the patent. False
7. It refers any creation or product of the human mind or intellect such as an
invention, original design, practical application of a good idea, trademark, literary or
artistic works. Intellectual Proprty
8. When normal earnings exceed future earnings, it is an indication of an
unidentifiable intangible asset. False
9. A franchise is a market based type of intangible whereby there are two parties in
a franchise agreement, the franchisee and the franchisor. (True or False)
10. On January 1, year 1, Leslie Company purchased a patent with a 5,200,000 and
a useful life of 10 years. On December 31, year 2, determined that impairment
indicators were present. The fair value less cost of disposal of the patent was
estimated to be 3,600,000. The value in use is estimated to be 3,800,000. What
amount should be reported as impairment loss for year 1?
Answer:
5,200,000/10=520,000*2=1,040,000-5,200,000=4,160,0003,800,000=360,000IL
11. Young Company purchased for cash at 50 per share all 150,000 ordinary shares
outstanding of another entity. The statement of financial position of the acquiree
on the date of acquisition showed net assets with a carrying amount of 6,000,000.
The fair value of property, plant and equipment on same date was 800,000 in
excess of carrying amount. What amount should be recorded as goodwill on the
date purchase?
Answer: 50*150,000=7,500,000-6,800,000=700,000
12. At year end, Vans Company showed the following account balances:
Patent
500,000
Deposit with advertising agency used to promote goodwill
400,000
Bond sinking fund
1,000,000
Excess of cost over fair value of identifiable net assets of acquired subsidiary
4,000,000
Trademark
900,000
What total amount should be reported as intangible assets? 5,400,000
Let’s Analyze (ULO c)
Answer the following adapted problems:
On January 1, year 1, Suzette Company signed a franchise agreement for a period
of 20 years for an initial fee of 6,000,000.
On the same date, the entity paid 2,000,000 which is not refundable and agreed to
pay the balance in four equal annual payments of 1,000,000 at each year end.
No future services are required are required of the franchisor.
borrow at 14% for a loan of this type.
Present value of 1 at 14% for 4 periods
0.59
Future amount of 1 at 14% for 4 periods
Present value of an ordinary annuity of 1 at 14% for 4 periods
The entity can
1.69
2.91
The agreement further provides that the franchisee shall pay a periodic fee of 5%
based on the annual gross sales. During the current year, Suzette Company
realized gross sales of 25,000,000
Prepare the journal entries for two years in connection with the franchise on the
books of the franchisee.
Required: Determine the initial measurement of the franchise and prepare the
entries for the company for the first two years.
Answer:
Franchise
4,910,000
Initial measurement
Discount on N/P
1,090,000
Cash
Note payable
2,000,000
4,000,000
2.91*1,000,000=2,910,000+2,000,000=4,910,000
2,910,000-4,000,000=1,090,000
Cash 25,000,000
Sales 25,000,000
Franchise fee expense 1,250,000
Cash
1,250,000
Amortization of Franchise 245,500
Franchise
Interest Expense
245,500
407,400
Discount on N/P
407,400
2,910,000*.14=407,400
YEAR 2
Amortization of Franchise 245,500
Franchise
Interest expense
245,500
82,964
Discount on N/P
82,964
2,910,000-407,400=592,600*.14=82,964
Research And Development
Let’s Check (ULO d)
In each item below, put a checkmark if it is a research and development expense.
Equipment acquired for use in various research
__________
Depreciation on the equipment
__________
Materials used
__________
Compensation costs of personnel
__________
Outside consulting fees
__________
Indirect costs appropriately allocated
__________
Modification to the formulation of a chemical product
__________
Trouble-shooting in connection with breakdowns during
Commercial production
__________
Design of tools, jigs, molds and dies involving new technology__________
Seasonal or other periodic design changes to existing products
__________
Laboratory research aimed at discovery of new technology
__________
Let’s Analyze (ULO e)
Answer the following adapted problems:
1. During the current year, Dangerous company incurred the following costs:
Research and development services performed by another
entity for Luminous
300,000
Design, construction and testing of preproduction prototype
And model
400,000
Testing in search for new product or process alternative
350,000
What total amount should be reported as research and development expense in the
current year?
Answer: 1,050,000
2. Milby company incurred the following research and development costs during
the current year:
Equipment purchased for current and future projects
150,000
Equipment purchased for current project only
300,000
Research and development salaries of current project
600,000
Legal fees to obtain patent
75,000
Material and labor costs for prototype product
900,000
The equipment has a five-year useful life and is depreciated using the straight line
method.
What total amount should be recognized as research and development expense for
current year?
Answer: 300,000+900,000 + 600,000 + 150,000/5= 1,830,000
3. Squarepants company made the following expenditures relating to product Y.
Legal costs to file a patent on Product Y. Production of the finished
Product would not have been undertaken without the patent
75,000
Special equipment to be used solely for the development of Product Y
The equipment has no other use and has an estimated useful life of 4 yrs
450,000
Labor and materials costs incurred in producing a prototype
1,500,000
Cost of testing the prototype
600,000
What total amount should be expensed when incurred?
Answer: 450,000+ 1,500,000 + 600,000 =2,550,000