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    Sol. Man. - Chapter 19 - Borrowing Costs - Ia Part 1B

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    Mahasia MANDIGAN
    This document contains sample problems and solutions related to calculating borrowing costs that are eligible for capitalization. It includes multiple choice and computational problems involving calculating average expenditures, capitalization rates, and determining the lower amount of actual interest incurred or computed interest to capitalize. The problems cover topics like allocating expenditures between specific and general borrowings, and applying both the traditional average accumulated expenditures method and contemporary avoidable cost method.

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    Sol. Man. - Chapter 19 - Borrowing Costs - Ia Part 1B

    Uploaded by

    Mahasia MANDIGAN
    205 views4 pages
    This document contains sample problems and solutions related to calculating borrowing costs that are eligible for capitalization. It includes multiple choice and computational problems involving calculating average expenditures, capitalization rates, and determining the lower amount of actual interest incurred or computed interest to capitalize. The problems cover topics like allocating expenditures between specific and general borrowings, and applying both the traditional average accumulated expenditures method and contemporary avoidable cost method.

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    SOL. MAN._CHAPTER 19_BORROWING COSTS_IA PART 1B

    Original Title

    SOL. MAN._CHAPTER 19_BORROWING COSTS_IA PART 1B

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    This document contains sample problems and solutions related to calculating borrowing costs that are eligible for capitalization. It includes multiple choice and computational problems involving calculating average expenditures, capitalization rates, and determining the lower amount of actual interest incurred or computed interest to capitalize. The problems cover topics like allocating expenditures between specific and general borrowings, and applying both the traditional average accumulated expenditures method and contemporary avoidable cost method.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    205 views4 pages

    Sol. Man. - Chapter 19 - Borrowing Costs - Ia Part 1B

    Uploaded by

    Mahasia MANDIGAN
    This document contains sample problems and solutions related to calculating borrowing costs that are eligible for capitalization. It includes multiple choice and computational problems involving calculating average expenditures, capitalization rates, and determining the lower amount of actual interest incurred or computed interest to capitalize. The problems cover topics like allocating expenditures between specific and general borrowings, and applying both the traditional average accumulated expenditures method and contemporary avoidable cost method.

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    © All Rights Reserved
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    Chapter 19

    Borrowing Costs

    PROBLEM 1: TRUE OR FALSE


    1. FALSE
    2. FALSE
    3. TRUE
    4. FALSE
    5. FALSE

    PROBLEM 2: THEORY & COMPUTATIONAL


    1. B
    2. A
    3. C
    4. D

    5. Answer: (12% x 1,000,000) – 18,000 = 102,000

    6. Solution:
    The average expenditures are computed as follows:
    Mos.
    Date Expenditures Average
    Outstanding
    1/1/x1 1,500,000 12/12 1,500,000
    6/1/x1 600,000 7/12 350,000
    11/30/x1 300,000 1/12 25,000
    Totals 2,400,000   1,875,000

    The capitalization rate is computed as follows:


    [(3M x 10%) + (1M x 8%)] ÷ (3M + 1M) = (300K + 80K) ÷ 4M = 9.5%

    1,875,000 x 9.5% = 178,125

    Actual = 380,000

    Borrowing costs eligible for capitalization = 178,125 (the lower amount)

    7. Solutions:

    Requirement (a): Ave. accumulated expenditure method (Traditional)


    The capitalization rate is computed as follows:
    Total interest expense on general borrowings
    (400K x 10%) + (900K x 8%) 112,000
    Divide by: Total general borrowings (400K + 900K) 1,300,000

    1
    Capitalization rate 8.62%

    Fraction
    of the Year Capitalized
    Expenditure Date Amount Outstanding Interest
    January 2, 2002 ₱500,000 12/12 ₱500,000
    May 1, 2002 500,000 8/12 333,333
    November 1, 2002 400,000 2/12 66,667
    Total weighted average expenditures for 2002 ₱900,000

    Specific Borrowing:
    Interest expense on specific borrowing (800K x 12%) 96,000
    Less: Investment income earned on specific borrowing ( - )
    Borrowing cost from specific borrowing 96,000

    General Borrowing:
    Average expenditures 900,000
    Less: Specific borrowing ( 800,000)
    Expenditures financed by general borrowing 100,000
    Multiply by capitalization rate 8.62%
    Borrowing cost from general borrowing 8,620

    Total 104,620

    The total actual borrowing cost is ₱208,000 (96K + 112K see


    computation above).
    The amount eligible for capitalization is ₱104,620 -
    the lower amount.

    Requirement (b): Avoidable interest method (Contemporary)

    The expenditures are allocated to the specific and general borrowings


    and the amounts allocated to the general borrowings are averaged.
    Expenditure Mos.
    Date Specific General Average
    s Outstanding
    500,00
    2-Jan-02 500,000
    0 N/A
    1-May- 300,00 200,00 133,33
    500,000
    02 0 0 N/A; 8/12 3
    1-Nov- 400,00 66,66
    400,000
    02 0 2/12 7
    800,00 600,00 200,00
    Totals 1,400,000  
    0 0 0

    Specific Borrowing:
    Interest expense on specific borrowing (800K x 12%) 96,000
    Less: Investment income earned on specific borrowing ( - )
    Borrowing cost from specific borrowing 96,000
    2
    General Borrowing:
    Average expenditure 200,000
    Multiply by: Capitalization rate (see req’mt. a) 8.62%
    Borrowing cost from general borrowing 17,240

    Total 113,240

    The total actual borrowing cost is ₱208,000 (96K + 112K).


    The amount eligible for capitalization is ₱113,240 - the lower
    amount.

    8. C

    3
    PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
    1. B (50,000 + 20,000) = 70,000 is greater than the actual interest
    incurred of 40,000. Therefore, 40,000, the lower amount, is
    capitalized.

    2. A (2,000,000 ÷ 2) = 1,000,000 average expenditures x 12% =


    120,000;
    The actual interest incurred of 102,000 is lower than the computed
    interest. Therefore, 102,000 is capitalized.

    3. C
    Solution:
    Interest costs incurred on warehouse constructed for Belardo's
    own use 20,000
    Special-order machine for sale to unrelated customer,
    produced
    according to customer's specifications 9,000
    29,00
    Capitalized interest
    0

    4. B (50K x 12/12) + (60K x 7/12) + (90K x 1/12) = 92,500

    5. C (1,000,000 + 1,000,000 + 600,000) ÷ (8,000,000 + 12,000,000 +


    4,000,000) = 10.833%

    6. B (1,000,000 + 600,000) ÷ (12,000,000 + 4,000,000) = 10%

    7. D (4M ÷ 2) = 2M x 12% = 240,000 vs. 204,000 actual; capitalizable


    borrowing cost is 204,000, the lower amount

    8. C (400,000 x 10%) + [(475,000 – 400,000) x 12%] = 49,000

    9. B [(30,000 x 12/12) + (80,000 ÷ 2)] = 70,000 x 9% = 6,300

    10. B (6% x 150,000) + [(250,000 – 150,000) x 9%] = (9,000 + 9,000) =


    18,000

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