Intermediate Accounting 1
AY 2023-2024
10 BORROWING COSTS
IAC1-10
TOPIC OUTLINE
Basic Concepts and
Definitions
Scope
Recognition
BORROWING COSTS
(PAS 23)
Commencement,
Suspension & Cessation
Accounting for
Borrowing Costs
Disclosures
Specific Borrowing
General Borrowing
Mixed Borrowing
LECTURE NOTES
BASIC CONCEPTS
Borrowing costs comprise of interest and other costs incurred by an entity in relation with borrowing of funds and
eventually forms part of the cost of a qualifying asset.
This means that borrowing costs are capitalizable only if the asset is a qualifying asset. Under PAS 23, a qualifying asset is
an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
The following are items classified as qualifying assets and items that are not classified as qualifying assets:
Qualifying Assets
Not Qualifying Assets
Inventories that takes a long period of time to
Assets measured at Fair Value (e.g. Biological
produce
Assets)
An item of PPE that takes a long period of time to
Financial Assets
construct or get ready for its intended use
Inventories that are routinely produced over a
Intangible assets that takes a long period of time
short-period of time or are mass-produced on
to develop
a repetitive basis
Assets that are ready for their intended use or
Investment properties measured under cost model
sale when acquired
Bearer plants that takes a long period of time to
get ready for its intended use
SCOPE OF PAS 23
The term borrowing costs is not limited to interest expense and other costs incurred in relation to a borrowing
arrangement. It may also include:
o
Interest expense on financial liabilities or lease liabilities computed using the effective interest method.
o
Exchange differences on foreign borrowings that are regarded as an adjustment to interest costs.
The Standard does not deal with the actual or imputed cost of equity, including preferred capital not classified as a
liability.
RECOGNITION (THE CORE PRINCIPLE OF PAS 23)
PAS 23, paragraph 1 provides the core principle in accounting borrowing costs. The standard states that borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that
asset. Other borrowing costs are recognized as an expense.
This means that the recognition principle set by PAS 23 is an exception to the general rule of recognizing interest expense
which is being expensed as incurred.
Intermediate Accounting 1 by Karim G. Abitago, CPA
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Page 1 of 13
COMMENCEMENT, SUSPENSION & CESSATION OF CAPITALIZATION
COMMENCEMENT OF CAPITALIZATION
PAS 23, paragraph 17, provides that the capitalization of borrowing cost as part of the cost of a qualifying asset shall
commence when the entity first meets all of the following conditions are present: (EBA)
o
It incurs expenditures for the asset.
o
It incurs borrowing cost.
o
It undertakes activities that are necessary to prepare the asset for the intended use or sale. Necessary activities
include technical and administrative work prior physical construction such as obtaining permits to construction and
drawing up plans or blueprints.
However, merely holding assets for use or development without any associated development activity does not qualify for
capitalization.
SUSPENSION OF CAPITALIZATION
An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active development
of a qualifying asset.
However, an entity does not normally suspend capitalizing borrowing costs during a period when it carries out substantial
technical and administrative work. An entity also does not suspend capitalizing borrowing costs when a temporary delay is
a necessary part of the process of getting an asset ready for its intended use or sale.
CESSATION OF CAPITALIZATION
Capitalization of borrowing cost should stop when substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when the physical construction of the asset is complete even though
routine administrative work might still continue. If minor modifications, such as the decoration of a property to the
purchaser’s or user’s specification, are all that are outstanding, this indicates that substantially all the activities are
complete.
When the construction of a qualifying asset is completed in parts and each part is capable of being used while construction
continues on other parts, capitalization of borrowing cost shall cease when substantially all activities necessary to prepare
that part for its intended use or sale are complete.
ACCOUNTING FOR BORROWING COSTS
Generally, capitalization of borrowing follows the concept of “avoidable interest method”. This means that borrowing costs
are capitalized if they are AVOIDABLE, meaning would not have been incurred if the expenditures on the qualifying asset
had not been made.
The accounting for borrowing costs depends on the type of borrowing that the entity entered into.
SPECIFIC BORROWING
Specific borrowing refers to funds borrowed SPECIFICALLY for the purpose of obtaining or constructing a qualifying asset.
The capitalizable borrowing costs are computed as follows:
CAPITALIZABLE BORROWING COSTS = ACTUAL BORROWING COSTS – INVESTMENT INCOME
GENERAL BORROWING
General borrowing is those obtained for more than one purpose other than construction or acquisition of qualifying assets.
The capitalizable borrowing costs are computed as follows:
CAPITALIZABLE BORROWING COSTS = LOWER AMOUNT BETWEEN ACTUAL BORROWING COSTS AND MAXIMUM
BORROWING COSTS
MAXIMUM BORROWING COSTS = AVERAGE EXPENDITURES x CAPITALIZATION RATE
CAPITALIZATION RATE = TOTAL INTEREST EXPENSE ON GENERAL BORROWINGS ÷ TOTAL GENERAL BORROWINGS
IMPORTANT NOTES:
o
Investment income is not deducted for general borrowing costs computation.
o
If ACTUAL borrowing costs > MAXIMUM borrowings costs; excess is not capitalized but rather expensed.
o
If ACTUAL borrowing costs < MAXIMUM borrowings costs; excess is not recognized.
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MIXED BORROWING
There are two (2) methods used in computing the capitalizable borrowing costs for mixed borrowing:
o
Average accumulated expenditure method (Traditional Method) – This method is simply a combination of the
above computations of borrowing costs.
SOLUTION GUIDE
Capitalizable Borrowing Costs – Specific Borrowing (Actual borrowing costs – investment income)
Capitalizable Borrowing Costs – General Borrowing
(Lower amount between actual and maximum borrowing costs (1))
CAPITALIZABLE BORROWING COSTS
Average expenditures (total expenditures)
Less: Specific borrowing
Ave. expenditures financed by general borrowing
Multiplied by capitalization rate
Maximum borrowing costs (1)
o
xx
xx
xx
xx
xx
xx
xx
xx
Avoidable interest method (Contemporary Method) – This method is similar to the traditional method except that
expenditures are allocated first to specific borrowing and the excess is allocated to the general borrowings. Only the
expenditures allocated to general borrowings are averaged.
SOLUTION GUIDE
Capitalizable Borrowing Costs – Specific Borrowing (Actual borrowing costs – investment income)
Capitalizable Borrowing Costs – General Borrowing
(Lower amount between actual and maximum borrowing costs (1))
CAPITALIZABLE BORROWING COSTS
Average expenditures (expenditures allocated to general borrowings only)
Multiplied by capitalization rate
Maximum borrowing costs (1)
xx
xx
xx
xx
xx
xx
DISCLOSURE REQUIREMENTS OF PAS 23
PAS 23, paragraph 26, provides that an entity shall disclose the following in relation to borrowing cost:
o
The amount of borrowing cost capitalized during the period.
o
The capitalization rate used to determine the amount of borrowing cost eligible for capitalization.
Segregation of assets that are "qualifying assets" from other assets in the statement of financial position is not required to be
disclosed.
Intermediate Accounting 1 by Karim G. Abitago, CPA
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Page 3 of 13
DISCUSSION EXERCISES
STRAIGHT PROBLEMS
PROBLEM 1 (CAPITALIZABLE BORROWING COSTS – SPECIFIC BORROWING)
At the beginning of the current year, 2024, TORONTO CORP. borrowed P1,500,000 from a bank to finance the construction
of a new building. The construction started on February 1, 2024. The loan matures 5 years on December 31, 2028 and has
an interest rate of 10%. The payments for the construction costs are staggered throughout the construction period which
provided an opportunity for the unused funds to earn an investment income from temporary investments amounting to
P30,000 beginning January to December.
REQUIREMENTS: (1) Determine the capitalizable borrowing cost; (2) What is the total cost of PPE? Assuming: (a) The
construction was completed on December 31, 2024; (b) The construction was completed on October 31, 2024.
PROBLEM 2 (CAPITALIZABLE BORROWING COSTS – GENERAL BORROWING)
On January 1, 2024, RAPTORS CORP. had the following borrowings made for general purposes, a part of proceeds was used
to finance the construction of a new factory plant.
12% long-term note
P3,000,000
10% bank loan
2,000,000
4% short-term note
1,000,000
The construction started on January 1, 2024 and the warehouse was completed on December 31, 2021 with total
construction costs of P1,200,000.
REQUIREMENTS: Compute the capitalizable borrowing cost and cost of the new building under the following assumptions:
(a) Assuming the expenditures of the construction were incurred as follows:
January 1
P475,000
March 31
100,000
July 1
300,000
October 1
200,000
December 31
125,000
(b) Assuming the expenditures of the construction amounting were incurred evenly during the year.
PROBLEM 3 (CAPITALIZABLE BORROWING COSTS – MIXED BORROWING)
On February 3, 2024, GOLDEN STATE CORP. started to construct a new building at a total contract price of P750,000. The
building was completed on July 31, 2024 with an estimated useful life of 10 years. The expenditures on building were made
as follows:
February 5, 2024
P300,000
April 2, 2024
150,000
May 4, 2024
200,000
July 31, 2024
100,000
The following were the borrowings made by the company which are all outstanding from January 1 to December 31, 2024.
Principal
Borrowing cost
10% bank loan
400,000
40,000
10% short-term note
600,000
60,000
8% long-term loan
1,000,000
80,000
2,000,000
180,000
The 10% bank loan relates specifically to finance the construction of the building. P4,500 interest income was earned until
June 30, 2024 from temporarily investing the funds to bond investments.
REQUIREMENTS: Under the traditional approach and contemporary approach, determine the following:
(a) What is the borrowing cost to be capitalized as cost of new building?
(b) What is the amount of expense to be presented in profit or loss for the year 2024 on the above transactions?
PROBLEM 4 (CAPITALIZABLE BORROWING COSTS - MIXED BORROWING WITH CAPITALIZATION PERIOD OF MORE
THAN ONE YEAR)
WIZARDS CORP. had loans outstanding during 2021 and 2022.
Specific construction loan
1,000,000
10%
General loan
7,500,000
12%
The entity began the self-construction of a new building on January 1, 2021 and the building was completed on December
31, 2022. Expenditures during 2021 and 2022 were:
January 1, 2021
1,000,000
July 1, 2021
2,000,000
November 1, 2021
1,500,000
July 1, 2022
500,000
REQUIREMENT: What is the cost of the new building on December 31, 2021 and December 31, 2022?
Intermediate Accounting 1 by Karim G. Abitago, CPA
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MULTIPLE CHOICE QUESTIONS (THEORIES)
1.
Under PAS 23, which of the following can be classified as a qualifying asset?
A.
An investment property under a long-term construction contract and accounted for using the fair value model.
B.
Consumable plants related to agricultural activities not yet ready for harvest.
C.
An internally developed patent not yet ready for its intended purpose.
D.
Inventories that are routinely produced over a short-period of time.
2.
The construction of a new manufacturing plant of KGA CORP. started during this year. Information regarding the
construction is provided as follows:
February 1
KGA borrowed from a bank to finance the construction
April 1
Finalize the blue print of the building and technical site planning
April 15
Acquisition of construction materials
May 1
Construction commences
The capitalization of borrowing starts on
A.
February 1
C.
April 15
B.
April 1
D.
May 1
3.
Under PAS 23, all of the following statements are incorrect, except:
A.
The term borrowing costs include imputed cost of equity such as cost of retained earnings.
B.
An entity should suspend the capitalization of borrowing cost during the periods with temporary delays and
such delay is a necessary part of the process of getting an asset ready for its intended use or sale.
C.
Capitalization of borrowing cost shall cease when all the activities necessary to prepare the qualifying asset for
its intended use or sale are complete.
D.
Interest revenue earned on specific borrowing for qualifying asset reduces the cost of the qualifying asset.
4.
Statement 1: Under PAS 23, if a qualifying asset is financed by a general borrowing, the capitalizable borrowing cost
is the lower amount between the actual interest cost of the borrowing and the limit set by PAS 23. The maximum
capitalizable borrowing cost allowed is equal to the average expenditures of the asset during the period multiplied
by a capitalization rate.
Statement 2: If the asset is financed by specific borrowing but a portion is used for working capital purposes, the
borrowing shall be treated as a general borrowing in determining capitalizable borrowing cost.
Statement 3: Under PAS 23, the term borrowing costs includes interest expense on financial liabilities computed using
effective interest method.
Which from the above statements is(are) correct?
A.
Only the first and the second statements
B.
Only the second and third statements
5.
C.
D.
All of the statements
None from the statements
Which of the following is a required disclosure under PAS 23?
A.
The amount of borrowing cost not capitalized during the period presented.
B.
Segregation of assets that are "qualifying assets" from other assets.
C.
The weighted average expenditures, in relation to general borrowing
D.
The capitalization rate used to determine the amount of borrowing cost eligible for capitalization.
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QUIZZER (DO-IT-YOURSELF DRILLS)
THEORIES
1.
Under PAS 23, the term borrowing costs does not include
A.
Interest expense on finance lease liability
B.
Interest expense of a bank overdraft
C.
Exchange differences on foreign borrowings that are regarded as an adjustment to interest costs.
D,
Imputed cost of newly issued ordinary shares
2.
Which of the following cannot be classified as qualifying asset?
(1) Investment property not yet ready for its intended purpose measured under fair value model.
(2) Building under construction to be used as office building in the future.
(3) Consumable plant related to agricultural activities not yet ready for harvest.
(4) Building under construction to be leased out under operating lease in the future measured under cost model.
A.
1 and 2
C.
1 and 3
B.
2 and 3
D.
2 and 4
3.
Under PAS 23, which of the following is not a requirement for the capitalization of borrowing cost to commence?
A.
Interest cost is incurred
B.
Expenditures related to the qualifying assets is incurred
C.
The existence of nominal interest rate
D.
Activities that are necessary to get the asset ready for the intended use are in progress.
4.
During the current year, KGA CORP. has constructed a building. In relation to this, the following activities are under
consideration:
January 31
Finalize the blue print of the building and technical site planning
March 21
KGA borrowed from a bank to finance the construction of its own building
April 15
Bought the construction materials
May 30
Started the construction
The entity can commence the capitalization of borrowing cost from what date?
A.
March 21
C.
May 30
B.
April 15
D.
None from the choices
5.
Determine whether the following statements are true or false:
I.
Capitalization of borrowing always commences when interest cost in relation to the borrowing is incurred.
II.
Borrowing costs related to non-qualifying assets are not capitalized but presented within statement of profit
or loss.
III.
If the asset is financed by specific borrowing but a portion is used for working capital purposes, the borrowing
shall be treated as a general borrowing in determining capitalizable borrowing cost.
A.
B.
C.
D.
Statement I
False
True
False
True
Statement II
True
True
True
True
Statement III
True
True
False
False
6.
Determine the incorrect statement regarding capitalization of borrowing costs under PAS 23?
A.
PAS 23 provides that if the asset is financed by specific borrowing, the capitalizable borrowing cost is equal to
the average expenditures of the asset during the period multiplied by a capitalization rate.
B.
The term borrowing costs which is capitalize under PAS 34 may include interest expense computed using
effective interest method.
C.
Interest revenue earned on specific borrowing for qualifying asset reduces the cost of the qualifying asset.
D.
None from the statements.
7.
Which statement is incorrect regarding capitalization of borrowing costs?
A.
Capitalization should commence when expenditures are being incurred, borrowing costs are being incurred
and activities that are necessary to prepare the asset for its intended use or sale are in progress.
B.
Capitalization should be suspended during extended periods in which active development is interrupted.
C.
Capitalization should cease when substantially all of the activities necessary to prepare the asset for its
intended use or sale are complete.
D.
If there are minor modifications outstanding this indicates that substantially all of the activities are not yet
complete.
8.
Under the revised PAS 23, borrowing costs that are not directly attributable to the acquisition, construction or
production of a qualifying asset, (other borrowing costs)
A.
Should be charged to expense when incurred.
B.
Should be capitalized as part of the cost of the asset for which the funds borrowed are used.
C.
May be charged to expense' or capitalized, depending on the decision of management.
D.
Should not be charged to expense nor capitalized.
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9.
When funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of
borrowing costs eligible for capitalization or that asset should be equal to
A.
Actual borrowing costs incurred.
B.
Actual borrowing costs incurred less any investment income on the temporary investment of those
borrowings.
C.
Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred,
whichever is higher.
D.
Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred,
whichever is lower.
10.
Which of the following best describes the concept of “avoidable interest” as used in capitalizing borrowing costs
under PAS 23?
A.
The cost of the funds or capital obtained.
B.
The total amount of interest incurred during the year.
C.
The portion of the interest incurred which would not have been incurred if expenditures for the qualifying
asset had not been made.
D.
The portion of the interest incurred in relation to the weighted average expenditures of the qualifying asset.
11.
First Statement: Investment properties under a long-term construction agreement is considered as a qualifying asset
if it is accounted for under fair value model.
Second Statement: If the asset is financed by specific borrowing but a portion is used for working capital purposes,
the borrowing shall be treated as a general borrowing in determining capitalizable borrowing cost.
A.
Only the first statement is correct.
C.
Both statements are correct.
B.
Only the second statement is correct.
D.
Neither of the statement is correct.
12.
Determine whether the following statements are true or false:
Statement 1:
Under PAS 23, the term borrowing costs include finance charges in respect of finance leases
recognized in accordance with PFRS 16.
Statement 2:
Investment income earned on funds obtained through specific borrowing reduces the cost of the
qualifying asset.
Statement 3:
Merely holding assets for use or development without any associated development activity
qualifies for capitalization of the borrowing costs under PAS 23.
A.
B.
C.
D.
Statement I
True
True
False
True
Statement II
True
True
True
False
Statement III
False
True
False
False
13.
Under the contemporary approach in accounting for the capitalizable borrowing costs under mixed borrowing:
A.
No borrowing costs shall be capitalized.
B.
The portion of the expenditures for the qualifying asset attributable to specific borrowing is not averaged.
C.
The actual borrowing cost incurred is capitalized in relation to general borrowing.
D.
All expenditures for the qualifying asset are time averaged.
14.
An asset is being constructed for an enterprise's own use. The asset has been financed with a specific new borrowing.
The interest cost incurred during the construction period as a result of expenditures for the asset is
A.
a part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset.
B.
interest expense in the construction period.
C.
recorded as a deferred charge and amortized over the term of the borrowing.
D.
a part of the historical cost of acquiring the asset to be written off over the term of the borrowing used to
finance the construction of the asset.
15.
All of the following is a required disclosure under PAS 23, except:
I.
The capitalized borrowing cost
II.
Segregation of qualifying assets from other assets
III.
The weighted average expenditures, in relation to general borrowing
A.
I and II
C.
I and III
B.
II and III
D.
II only
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PROBLEMS
Use the following information in answering the next THREE (3) questions:
On January 1, 2024, SPURS CORP. obtained a 10%, P300,000 loan, specifically to finance the construction of a new
administrative building. The construction was completed on September 30, 2024. Funds not yet needed during the
construction were temporarily invested on short-term debit securities generating a P2,500 interest income from the
beginning of the year until the end of the construction.
The construction costs were incurred as follows:
January 1
May 1
June 30
September 1
September 30
P100,000
80,000
130,000
120,000
50,000
The administrative building is to be depreciated using straight-line method over its estimated useful life of 5 years
with no residual value.
1.
What is the amount of capitalizable borrowing cost?
A.
P27,500
C.
B.
P20,000
D.
P22,500
P30,000
SOLUTION:
Interest incurred within capitalization period (P300,000 x 10% x 9/12)
Investment income earned
Capitalizable borrowing cost
2.
P22,500
(2,500)
P20,000
What is the initial cost of the self-constructed administrative building?
A.
P510,000
C.
P507,500
B.
P502,500
D.
P500,000
SOLUTION:
Total construction costs (P100,000 + P80,000 + P130,000 + P120,000 + P50,000)
Capitalizable borrowing cost
Initial cost of the administrative building
3.
P480,000
20,000
P500,000
What is the total amount of expense presented within profit or loss during 2024 in relation to the above information?
A.
P107,500
C.
P32,500
B.
P112,500
D.
P25,000
SOLUTION:
Interest expense (P300,000 x 10% x 3/12)
Depreciation expense (P500,000 ÷ 5 years x 3/12)
Total expense
P7,500
25,000
P32,500
Use the following information in answering the next THREE (3) questions:
LAKERS CORP. has the following borrowings which are all outstanding for the whole year of 2023:
Principal
Interest
12% bank loan
P1,000,000
P120,000
15% long-term note
2,000,000
300,000
The above borrowings were made for general purposes and portions of it were used to finance the construction of a
new manufacturing facility. The construction of the building started on March 1, 2023 and was completed on
September 1, 2023. Expenditures on such construction were made as follows:
March 1
P600,000
May 1
450,000
May 30
300,000
August 1
300,000
September 1
50,000
4.
What is the weighted average interest rate used in computing the capitalizable borrowing cost?
A.
12.50%
C.
15.20%
B.
14.00%
D.
11.00%
SOLUTION:
Total interest incurred for one year (P120,000 + P300,000)
Total outstanding borrowings
Weighted average interest rate
5.
P 420,000
÷ 3,000,000
14.00%
What is the amount of interest capitalized as part of the initial cost of the constructed manufacturing facility?
A.
P154,000
C.
P60,500
B.
P145,000
D.
P77,000
SOLUTION:
March 1 (P600,000 x 6/6)
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P600,000
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May 1 (P450,000 x 4/6)
May 30 (P300,000 x 3/6)
August 1 (P300,000 x 1/6)
September 1 (P50,000 x 0/6)
Total weighted average expenditures
Weighted average interest rate
Capitalizable borrowing cost for one year
Apportionment
Capitalizable borrowing cost
6.
300,000
150,000
50,000
P1,100,000
x 14%
P154,000
x 6/12
P77,000
How much interest should be recognized as interest expense?
A.
P266,000
C.
B.
P343,000
D.
SOLUTION:
Total interest incurred for 2024
Capitalized borrowing cost
Interest expensed during 2024
P420,000
(77,000)
P343,000
Use the following information in answering the next FIVE (5) questions:
At the beginning of 2023, KOBE CORP. has decided to construct an office building over the land it has recently
acquired. The company hired an independent contractor to construct the office building the total contract price is
P4,000,000. The payments on the contractor were made as follows:
Payment Date
Amount
January 1
P1,000,000
March 31
1,800,000
September 30
600,000
December 31
600,000
The construction was completed on December 31, 2023.
The following borrowings were made by KOBE CORP. and are all outstanding for the year 2023.
•
10%, P1,200,000, five-year note dated January 1, 2020, with simple interest payable annually, specifically
borrowed to finance the construction project. Interest income earned on the temporary investment of the
proceeds is P20,000.
•
10%, P5,000,000, ten-year note dated December 31, 2018, with interest payable annually.
•
12%, P5,000,000, seven-year note dated December 31, 2019, with interest payable annually.
7.
What is the weighted average interest rate used in computing the capitalizable borrowing cost related to general
borrowing?
A.
12.50%
C.
11.00%
B.
14.00%
D.
10.30%
SOLUTION:
Interest of 10% ten-year note (P5,000,000 x 10%)
Interest of 12% seven-year note (P5,000,000 x 12%)
Total interest of general borrowings
Total amount of general borrowings
Weighted average interest rate
8.
Using the traditional approach, what is the amount of capitalizable borrowing cost?
A.
P350,000
C.
P215,000
B.
P265,000
D.
P325,000
SOLUTION:
January 1 (P1,000,000 x 12/12)
March 31 (P1,800,000 x 9/12)
September 30 (P600,000 x 3/12)
December 31 (P600,000 x 0/12)
Total weighted average expenditures
Amount of specific borrowing
WAEX attributable to general borrowing
Weighted average interest rate
Capitalizable borrowing cost – general borrowing
Capitalizable borrowing cost – specific borrowing [(P1,200,000 x 10%) – P20,000]
Total capitalizable borrowing cost
9.
P500,000
600,000
1,100,000
÷ 10,000,000
11.00%
P1,000,000
1,350,000
150,000
P2,500,000
(1,000,000)
P1,500,000
x 11.00%
P165,000
100,000
P265,000
Using the traditional approach, what is the amount of interest expensed on the statement of profit or loss?
A.
P935,000
C.
P850,000
B.
P830,000
D.
P855,000
SOLUTION:
Total interest from general borrowings
Capitalized borrowing cost from general borrowings
Interest expensed
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P1,100,000
(165,000)
P935,000
Page 9 of 13
10.
Using the contemporary approach, what is the amount of capitalizable borrowing cost?
A.
P290,000
C.
P270,000
B.
P228,500
D.
P248,500
SOLUTION:
March 31 (P1,600,000 x 9/12)
September 30 (P600,000 x 3/12)
December 31 (P600,000 x 0/12)
WAEX attributable to general borrowing
Weighted average interest rate
Capitalizable borrowing cost – general borrowing
Capitalizable borrowing cost – specific borrowing [(P1,200,000 x 10%) – P20,000]
Total capitalizable borrowing cost
11.
1,200,000
150,000
P1,350,000
x 11.00%
P148,500
100,000
P248,500
Using the contemporary approach, what is the amount of interest expensed on the statement of profit or loss?
A.
P951,500
C.
P970,000
B.
P925,500
D.
P934,600
SOLUTION:
Total interest from general borrowings
Capitalized borrowing cost from general borrowings
Interest expensed
P1,100,000
(148,500)
P951,500
Use the following information in answering the next FOUR (4) questions:
KGA CORP. has a 10%, P1,500,000, specific borrowing loan and a 12%, P10,000,000 general loan outstanding for the
entire years of 2022 and 2023. The entity began the self-construction of its manufacturing plant on January 1, 2022
and was completed on December 31, 2023.
The expenditures on such self-construction were made as follows:
January 1, 2022
P2,000,000
April 1, 2022
2,500,000
December 1, 2022
1,500,000
March 1, 2023
3,000,000
NOTE: Use the traditional approach in accounting for the mixed borrowings made by the company.
12.
What is the capitalizable borrowing cost for the year 2022?
A.
P300,000
C.
P450,000
B.
P500,000
D.
P550,000
SOLUTION:
January 1, 2022 (P2,000,000 x 12/12)
April 1, 2022 (P2,500,000 x 9/12)
December 1, 2022 (P1,500,000 x 1/12)
Total weighted average expenditures
Amount of specific borrowing
WAEX attributable to general borrowing
Weighted average interest rate
Capitalizable borrowing cost – general borrowing
Capitalizable borrowing cost – specific borrowing (P1,500,000 x 10%)
Total capitalizable borrowing cost
13.
What is the capitalizable borrowing cost for the year 2023?
A.
P1,120,000
C.
P1,254,000
B.
P1,066,000
D.
P1,044,000
SOLUTION:
Total construction cost for the year 2022 (P2,000,000 + P2,500,000 + P1,500,000)
Capitalizable borrowing cost
Cumulative expenditures as of January 1, 2023
Weighted average expenditure March 1, 2023 (P3,000,000 x 10/12)
Total weighted average expenditures
Amount of specific borrowing
WAEX attributable to general borrowing
Weighted average interest rate
Capitalizable borrowing cost – general borrowing
Capitalizable borrowing cost – specific borrowing (P1,500,000 x 10%)
Total capitalizable borrowing cost
14.
P2,000,000
1,875,000
125,000
P4,000,000
(1,500,000)
P2,500,000
x 12.00%
P300,000
150,000
P450,000
P6,000,000
450,000
P6,450,000
2,500,000
P8,950,000
(1,500,000)
P7,450,000
x 12.00%
P894,000
150,000
P1,044,000
What is the initial cost of the manufacturing plant upon its completion on December 31, 2023?
A.
P 7,494,000
C.
P12,694,000
B.
P10,494,000
D.
P11,300,000
SOLUTION:
Total construction costs (P2,000,000 + P2,500,000 + P1,500,000 + P3,000,000)
Capitalizable borrowing costs from 2022 and 2023 (P450,000 + P1,044,000)
Total initial cost of the manufacturing plant
Intermediate Accounting 1 by Karim G. Abitago, CPA
Trust the Process!
P9,000,000
1,494,000
P10,494,000
Page 10 of 13
15.
Assuming the construction of the manufacturing plant was completed on June 30, 2023, what is the capitalizable
borrowing cost for the year 2023?
A.
P492,000
C.
P930,000
B.
P450,000
D.
P984,000
SOLUTION:
Total construction cost for the year 2022 (P2,000,000 + P2,500,000 + P1,500,000)
Capitalizable borrowing cost
Cumulative expenditures as of January 1, 2023
Weighted average expenditure March 1, 2023 (P3,000,000 x 4/6)
Total weighted average expenditures
Amount of specific borrowing
WAEX attributable to general borrowing
Weighted average interest rate
Capitalizable borrowing cost – general borrowing for one year
P6,000,000
450,000
P6,450,000
2,000,000
P8,450,000
(1,500,000)
P6,950,000
x 12.00%
P834,000
Capitalizable borrowing cost – general borrowing (P834,000 x 6/12)
Capitalizable borrowing cost – specific borrowing (P1,500,000 x 10% x 6/12)
Total capitalizable borrowing cost
P417,000
75,000
P492,000
Use the following information in answering the next TWO (2) questions:
NOWITZKI CORP. had the following general borrowings during 2023, which were used to finance the construction of
the company's new warehouse:
Principal
Borrowing Cost
10% bank loan
P2,400,000
P240,000
10% short-term note
1,600,000
160,000
12% long-term note
2,000,000
240,000
The construction began on January 1, 2023 and the warehouse was completed on December 31, 2023. Expenditures
on the construction of the warehouse totaled P4,000,000, which were incurred evenly throughout the construction
period.
(Round-off the weighted average interest rate in two decimal places e.g. 11.50%)
16.
Which of the following statements is correct in relation to the above self-construction of the warehouse?
First Statement: The weighted average interest rate used for capitalization of borrowing cost is 11.25%.
Second Statement: The weighted average expenditures of the construction amounted to P1,000,000.
A.
Only the first statement
C.
Both statements
B.
Only the second statement
D.
None from the statements
SOLUTION:
Weighted average expenditures (P4,000,000 ÷ 2)
Total interest incurred (P240,000 + P160,000 + P240,000)
Total general borrowings made (P2,400,000 + P1,600,000 + P2,000,000)
Weighted average interest rate
17.
P2,000,000
P640,000
÷ 6,000,000
10.67%
How much is the capitalizable borrowing cost from the general borrowings made by the company?
A.
P212,500
C.
P213,400
B.
P185,200
D.
P225,000
SOLUTION:
Weighted average expenditures (P4,000,000 ÷ 2)
Weighted average interest rate
Capitalizable borrowing cost
P2,000,000
x 10.67%
P213,400
Use the following information in answering the next THREE (3) questions:
On March 1, 2023, CURRY CORP. has started the construction of its new office building. The expenditures on such
construction, which was completed on November 30, were made as follows:
March 1
P400,000
June 1
600,000
August 1
450,000
September 1
300,000
November 30
50,000
The following were the borrowings made by CURRY CORP. which are all outstanding from January 1 to December 31,
2023.
Principal
Borrowing cost
10% bank loan
P800,000
P80,000
15% long-term note
1,000,000
150,000
12% long-term loan
2,000,000
240,000
P3,800,000
P470,000
Intermediate Accounting 1 by Karim G. Abitago, CPA
Trust the Process!
Page 11 of 13
The 10% bank loan relates specifically to finance the construction of the building. P12,000 interest income was
earned until June 30, 2023 from temporarily investing the funds to short-term debt investments.
NOTE: Use the traditional approach in accounting for the mixed borrowings made by the company.
18.
How much is the borrowing cost to be capitalized as cost of new building?
A.
P75,250
C.
P87,000
B.
P81,250
D.
P89,250
SOLUTION:
March 1 (P400,000 x 9/9)
June 1 (P600,000 x 6/9)
August 1 (P450,000 x 4/9)
September 1 (P300,000 x 3/9)
November 30 (P50,000 x 0/9)
Total weighted average expenditures
Amount of specific borrowing
WAEX attributable to general borrowing
Weighted average interest rate (P390,000 ÷ P3,000,000)
Capitalizable borrowing cost – general borrowing for one year
P400,000
400,000
200,000
100,000
P1,100,000
(800,000)
P300,000
x 13.00%
P39,000
Capitalizable borrowing cost – general borrowing (P39,000 x 9/12)
Capitalizable borrowing cost – specific borrowing [(P80,000 x 9/12) – (P12,000 x 4/6)]
Total capitalizable borrowing cost
19.
What is the amount of interest expense to be presented in the Statement of Comprehensive Income for the year ended
December 31, 2017
A.
P383,000
C.
P394,750
B.
P380,750
D.
P388,750
SOLUTION:
Total interest incurred during the year
Capitalized borrowing costs
Interest expensed
20.
P29,250
52,000
P81,250
P470,000
(81,250)
P388,750
What is the initial cost of the building?
A.
P1,875,250
B.
P1,881,250
C.
D.
SOLUTION:
Total capitalizable borrowing cost
Total construction costs
Initial cost of the building
P1,887,000
P1,889,250
P81,250
1,800,000
P1,881,250
- END OF HANDOUTS -
Intermediate Accounting 1 by Karim G. Abitago, CPA
Trust the Process!
Page 12 of 13