Problem 25-7

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 of general purposes.
The loan is to be repaid commencing the month following completion of the building.
Expenditure 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
Solution:
Average expenditures (10,000,000 / 2) 5,000,000
x
Interest rate 12%

Capitalized interest 600,000

2. What is the interest expense for 2020?

a. 1,800,000
b. 1,200,000
c. 1,600,000
d. 1,000,000
Solution:XPrincipal x Interest
rate (15,000,000 x 12%) 1,800,000
Capitalized interest (600,000)
Interest expense 1,200,000

Problem 25-10
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

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 used the extra P5,000,000 for the working capital purposes.
Bank term loan 7% 5,000,000
Institutional borrowing 8% 10,000,000
Corporate bonds 9% 10,000,000
In the first phase of the construction of the tunnel, three were idle funds of P10,000,000
which 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. 4,100,000
b. 3,280,000
c. 3,200,000
d. 2,780,000

Solution:
XAnnual Interest
7% Bank term loan 5,000,000 350,000
8% Institutional borrowing 10,000,000 800,000
9% Corporate bonds 10,000,000 900,000
Total 2,050,000

Average interest rate (2,050,000/ 25,000,000) 8.2%

Principal 25,000,000
General (5,000,000)
Specific 20,000,000

Capitalizable borrowing cost (20,000,000 x 8.2% x 2 years) 3,280,000

Problem 25-15
On June 1, 2020, Circus Company began construction of the new manufacturing plant. The
plant was completed on October 31, 2021. Expenditures on the project were:
July 1, 2020 5,000,000
October 1, 2020 3,000,000
February 1, 2021 3,000,000
April 1, 2021 2,000,000
September 1, 2021 2,000,000
October 1, 2021 500,000
On July 1, 2020, the entity obtained a P7,000,000 construction loan with a 6% interest rate.

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 The loan was outstanding through the end of October 2021.
The only other interest-bearing debt was a long-term not 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. 210,000
b. 195,000
c. 390,000
d. 420,000
Solution:
X Expenditures Fraction Average
5,000,00
July 1, 2020 5,000,000 6/6 0
1,500,00
Oct. 1, 2020 3,000,000 3/6 0
6,500,00
Average expenditures for 2020 0

Capitalized interest from specific borrowing 195,000

(6,500,000 x 6% x 6/12)

July 1, 2020 5,000,000

Oct. 1, 2020 3,000,000
Actual expenditure- 2020 8,000,000
Capitalized interest in 2020 195,000
Cost incurred to date- Dec. 31,
2020 8,195,000

Expenditures Fraction Average

Jan. 1, 2021 8,195,000 10/10 8,195,000

Feb. 1, 2021 3,000,000 9/10 2,700,000

Apr. 1, 2021 2,000,000 7/10 1,400,000

Sept. 1, 2021 2,000,000 2/10 400,000

Oct. 1, 2021 500,000 1/10 50,000

Average expenditures for 2021 12,745,000

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 2. What amount of interest should be capitalized in 2021?
a. 1,000,000
b. 1,350,000
c. 700,000
d. 733,000
Solution:
Average expenditures for 2021 12,745,000
Specific (7,000,000)
General 5,745,000

(7,000,000 x 6% x
Specific borrowing 10/12) 350,000
(5,745,000 x 8% x
General borrowing 10/12) 383,000

Capitalized interest in 2021 733,000

3. What is the interest expense for 2021?

a. 1,200,000
b. 1,270,000
c. 887,000
d. 537,000
Solution: XInterest on
specific (7,000,000 x 6%) 420,000

Interest on general (15,000,000 x 8%) 1,200,000

Total interest in 2021 1,620,000

Capitalized interest in
2021 (733,000)

Interest expense in 2021 887,000

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