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Borrowing Costs
Intermediate Accounting (University of San Carlos)
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CHAPTER 25: BORROWING COSTS
ANSWERS:
Problem 25-6
Problem 25-7
Problem 25-8
Problem 25-9
Problem 25-10
Problem 25-11
Problem 25-12
A
1
2
B
A
B
C
D
Problem 25-13
C
B
Problem 25-14
Problem 25-15
1
2
1
2
1
2
3
D
A
B
C
B
D
C
Problem 25-6 (AICPA Adapted)
Chum Company started construction of a new office building on January 1, 2020 and moved into
the finished building on July 1, 2021.
Of the P25,000,000 total cost of the building, P20,000,000 was incurred in 2020 evenly
throughout the year.
The entity’s incremental borrowing rate was 12% throughout 2020, and the total amount of
interest incurred was P1,020,000.
What amount should be reported Downloaded
as capitalized
on December 31, 2020?
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(ellazaspa56224@gmail.com)
interest incurred was P1,020,000.
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What amount should be reported as capitalized interest on December 31, 2020?
a.
b.
c.
d.
1,020,000
1,200,000
1,500,000
2,400,000
Solution:
When expenditures are incurred evenly, the average expenditure can be approximated by simply
dividing the total expenditures by two.
Average expenditures (20,000,000/2)
Multiply by capitalization rate
Interest capitalized on average expenditures
10,000,000
12%
1,200,000
The amount computed above is compared with the actual borrowing cost of 1,020,000. The
capitalizable borrowing cost is limited to the actual borrowing cost incurred. Therefore, the
capitalizable interest is P1,020,000 - the lower amount.
Problem 25-7 (PHILCPA Adapted)
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Marauder Company borrowed P15,000,000 at 12% to finance in part the construction of a new
building on January 1, 2020 and in part for general purposes.
The loan is to be repaid commencing the month following completion of the building.
Expenditures for the completed structure totaled P10,000,000 during the year ended December
31, 2020. These expenditures were incurred evenly throughout the year.
The entity earned interest of P200,000 for the year on the unexpended portion of the loan.
1. What amount of interest is capitalized on December 31, 2020?
a. 1,200,000
b. 1,000,000
c.
600,000
d.
400,000
2. What is the interest expense for 2020?
a.
b.
c.
d.
1,800,000
1,200,000
1,600,000
1,000,000
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d. 1,000,000
Solution
Average expenditures (10,000,000/2)
Multiply by capitalization rate
Interest capitalized on average expenditures
5,000,000
12%
600,000
The capitalizable borrowing cost shall not exceed the actual borrowing cost.
The amount of capitalizable borrowing cost is 600,000 because it is less than the actual
borrowing cost of 1,800,000.
The excess of 1,800,000 over 600,000 or 1,200,000 is charged to interest expense.
Problem 25-8 (IAA)
The third year of a construction project of Jamboree Company began with a P3,000,000 balance
in construction in progress. Included in that figure is P600,000 of interest capitalized in the first
two years.
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Construction expenditures during the third year totaled P8,000,000 which were incurred evenly
throughout the entire year.
The entity has over P30,000,000 in interest-bearing debt outstanding in the third year at a
weighted average rate of 9%.
What amount of interest for the third year is capitalized?
a.
b.
c.
d.
360,000
630,000
936,000
990,000
Solution:
Accumulated expenditures at the end of two years
Average expenditures in the third year (8,000,000/2)
Total
Capitalizable interest (7,000,000 x 9%)
3,000,000
4,000,000
7,000,000
630,000
Problem 25-9 (IAA)
Jugular Company started construction on a building on January 1 of the current year and
completed construction on December 31 of the same year.
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completed construction on December 31 of the same year.
The entity had only two interest-bearing notes outstanding during the year, and both of these
notes were outstanding for all 12 months of the year.
The following information is available:
Average accumulated expenditures
Ending balance in construction in progress before
capitalization of interest
6% note incurred specifically for the project
9% long-term note
2,500,000
3,600,000
1,500,000
5,000,000
What is the total cost of the building?
a. 3,780,000
b. 3,680,000
c. 3,750,000
d. 3,825,000
Solution:
Average accumulated expenditures
Applicable to specific loan
Applicable to general loan
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2,500,000
(1,500,000)
1,000,000
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Ending balance in construction in progress before
capitalization of interest
Capitalizable borrowing cost:
Specific (6% x 1,500,000)
General (9% x 1,000,000)
Total cost of building
3,600,000
90,000
90,000
180,000
3,780,000
Problem 25-10 (IFRS)
Ultimate Company decided to construct a tunnel that will link two sides of the village separated
by a natural disaster.
The tunnel would take two years to build and the total capital outlay needed for the construction
would not be less than P20,000,000.
To allow itself a margin of safety, the entity borrowed P25,000,000 from three sources and used
the extra P5,000,000 for working capital purposes.
Bank term loan
Institutional borrowing
Corporate bonds
7%
8%
9%
5,000,000
10,000,000
10,000,000
In the first phase of the construction of the tunnel, there were idle funds of P10,000,000 which
the entity invested for a period of six months. Income from this investment was *P500,000.
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the entity invested for a period of six months. Income from this investment was *P500,000.
What amount of borrowing cost should be capitalized as cost of the asset?
a.
b.
c.
d.
4,100,000
3,280,000
3,200,000
2,780,000
Solution:
Principal
5,000,000
10,000,000
10,000,000
25,000,000
7% Bank term loan
8% Institutional borrowing
9% Corporate bonds
Average interest rate (2,050,000/25,000,000)
Interest
350,000
800,000
900,000
2,050,000
8.2%
Capitalizable total borrowing costs (20,000,000 x 8.2% x 2 years)
3,280,000
*The construction is financed by general borrowings, and no specific guidance is provided for
general borrowing with respect to investment income. Therefore, the investment income of
P500,000 is ignored.
Problem 25-11 (IAA)
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Moses Company borrowed P4,000,000 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 P6,000,000, 12% mortgage payable on an office building.
At the end of the current year, average accumulated expenditures on the new warehouse totaled
P4,750,000.
What amount of interest should be capitalized for the current year?
a.
b.
c.
d.
400,000
475,000
490,000
522,500
Solution:
Average accumulated expenditures
Applicable to specific loan
Applicable to general loan
Capitalizable borrowing cost:
Specific (4,000,000 x 10%)
General (750,000 x 12%)
4,750,000
(4,000,000)
750,000
400,000
90,000
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490,000
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General (750,000 x 12%)
90,000
490,000
Problem 25-12 (IAA)
During 2020, Israel Company constructed asset costing P4,215,000. The weighted average
accumulated expenditures on the asset during the current year amounted to P3,900,000.
The entity borrowed P2,000,000 at 7.5% on January 1, 2020. Funds not needed for construction
were temporarily invested in short-term securities and a P1,000,0000. 8% note payable dated
November 2, 2019.
What amount of interest should be capitalized during 2020?
a.
b.
c.
d.
324,800
297,500
273,000
265,800
Solution:
10% 10-year note payable - October 1, 2019
8% 10-year note payable - November 2, 2019
Total general borrowing
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Principal
1,500,000
1,000,000
2,500,000
Interest
150,000
80,000
230,000
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Average rate (230,000/2,500,000)
Capitalizable borrowing cost:
Specific borrowing (2,000,000 x 7.5%)
Interest revenue
General borrowing (1,900,000 x 9.2%)
9.2%
150,000
(59,000)
174,800
265,800
Problem 25-13 (IFRS)
Demure Company commenced construction of a new plant on February 1, 2020. The cost of
P18,000,000 was paid in full to the contractor on February 1, 2020 and was funded from existing
general borrowings.
The construction was completed on September 30, 2020. The borrowings outstanding during the
current year comprised:
Bank A – 6%
Bank B – 6.6%
Bank C – 7%
8,000,000
10,000,000
30,000,000
1. What amount of borrowing cost should be capitalized?
a. 1,215,000
b. 2,100,000
c. 3,240,000
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b. 2,100,000
c. 3,240,000
d. 810,000
Solution:
Principal
8,000,000
10,000,000
30,000,000
48,000,000
6% Bank A
6.6% Bank B
7% Bank C
Average interest rate (3,240,000/48,000,000)
Capitalizable borrowing costs (18,000,000 x 6.75% x 8/12)
2. What is the interest expense for the current year?
a. 2,430,000
b. 3,240,000
c. 2,160,000
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Interest
480,000
660,000
2,100,000
3,240,000
6.75%
810,000
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d. 1,350,000
Solution:
Total interest
Capitalizable borrowing costs
Interest expense
3,240,000
(810,000)
2,430,000
Problem 25-14 (AICPA Adapted)
During 2020, Elijah Company constructed a new building at a cost of P30,000,000. The
expenditures for the building which was finished late in 2020 were incurred evenly during the
year.
The entity had the following loans outstanding on December 31, 2020.
 10% note to finance specifically the construction, dated January 1, 2020, P10,000,000.
The note is unpaid on December 31, 2020.
Investments were made on the proceeds from the loan and income of P100,000 was
realized in 2020.

12% 10-year bonds issued at face amount on April 30, 2019, P30,000,000.

8% 5-year note payable, dated March 1, 2019, P10,000,000.
1. What is the capitalizable borrowing cost?
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1. What is the capitalizable borrowing cost?
a.
b.
c.
d.
1,550,000
1,450,000
1,400,000
1,500,000
2. What is the interest expense for 2020?
a.
b.
c.
d.
4,400,000
2,850,000
3,850,000
2,950,000
Solution:
Average expenditures (30,000,000/2)
Applicable to specific loan
Applicable to general loan
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15,000,000
(10,000,000)
5,000,000
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Principal
30,000,000
10,000,000
40,000,000
12% 10-year bonds payable
8%
5-year note payable
Total general borrowing
Average capitalizable rate (4,400,000/40,000,000)
Capitalizable borrowing cost
Interest on specific borrowing (10% x 10,000,000)
Interest income
Interest on general borrowing (11% x 5,000,000)
Interest
3,600,000
800,000
4,400,000
11%
1,000,000
(100,000)
550,000
Interest expense for 2020 (4,400,000 – 550,000)
1,450,000
3,850,000
Problem 25-15 (IAA)
On June 1, 2020, Circus Company began construction of a new manufacturing plant. The plant
was completed on October 31, 2021. Expenditures on the project were:
July
1, 2020
October 1, 2020
February 1, 2021
April
1, 2021
September 1, 2021
October
1, 2021
5,000,000
3,000,000
3,000,000
2,000,000
2,000,000
500,000
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September 1, 2021
October
1, 2021
2,000,000
500,000
On July 1, 2020, the entity obtained a P7,000,000 construction loan with a 6% interest rate. The
loan was outstanding through the end of October 2021.
The only other interest-bearing debt was a long-term note for P15,000,000 with an interest rate
of 8%.
This note was outstanding during 2020 and 2021. The fiscal year-end is December 31.
1. What amount of interest should be capitalized in 2020?
a.
b.
c.
d.
210,000
195,000
390,000
420,000
Solution:
July
1, 2020
(5,000,000 x 6/6)
October 1, 2020
(3,000,000 x 3/6)
Average expenditures in 2020
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5,000,000
1,500,000
*6,500,000
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Capitalizable interest from specific borrowing (6,500,000 x 6% x 6/12)
195,000
*There is no general borrowing from the 2020 average expenditures because the specific
borrowing is P7,000,000.
*January 1, 2021 (8,195,000 x 10/10)
February 1, 2021 (3,000,000 x 9/10)
April
1, 2021 (2,000,000 x 7/10)
September1, 2021 ( 2,000,000 x 2/10)
October 1,2021 ( 500,000 x 1/10)
Average expenditures in 2021
8,195,000
2,700,000
1,400,000
400,000
50,000
12,745,000
The construction for 2021 is 10 months because the plant was completed on October 31, 2021.
July
1, 2020
October
1, 2020
Actual expenditures for 2020
Capitalizable interest for 2020
*Cost incurred to December 31, 2020
2. What amount of interest should be capitalized in 2021?
a. 1,000,000
b. 1,350,000
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5,000,000
3,000,000
8,000,000
195,000
8,195,000
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a. 1,000,000
b. 1,350,000
c.
700,000
d. 733,000
Solution:
Average expenditures in 2021
Applicable to specific loan
Applicable to general loan
12,745,000
( 7,000,000)
5,745,000
Capitalizable borrowing cost:
Specific (7,000,000 x 6% x 10/12)
General (5,745,000 x 8% x 10/12)
3. What is the interest expense for 2021?
a. 1,200,000
b. 1,270,000
c.
887,000
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350,000
383,000
733,000
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d.
537,000
Solution:
Total interest incurred in 2021
Interest on specific (7,000,000 x 6%)
Interest on general (15,000,000 x 8%)
Capitalizable in 2021
Interest expense for 2021
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420,000
1,200,000
1,620,000
( 733,000)
887,000
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