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    Question 1 Alma Limited-Eng

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    chad sampson
    The document discusses the capitalization of borrowing costs for a company, Alma Limited, over three years based on two assumptions: 1) Loans were incurred specifically for construction of an asset. Under this assumption, borrowing costs of R312,000 should be capitalized over the three years. 2) Financing was from general sources not specifically tied to construction. Under this assumption, borrowing costs of R286,390 should be capitalized over the three years.

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    Question 1 Alma Limited-Eng

    Uploaded by

    chad sampson
    18 views3 pages
    The document discusses the capitalization of borrowing costs for a company, Alma Limited, over three years based on two assumptions: 1) Loans were incurred specifically for construction of an asset. Under this assumption, borrowing costs of R312,000 should be capitalized over the three years. 2) Financing was from general sources not specifically tied to construction. Under this assumption, borrowing costs of R286,390 should be capitalized over the three years.

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    The document discusses the capitalization of borrowing costs for a company, Alma Limited, over three years based on two assumptions: 1) Loans were incurred specifically for construction of an asset. Under this assumption, borrowing costs of R312,000 should be capitalized over the three years. 2) Financing was from general sources not specifically tied to construction. Under this assumption, borrowing costs of R286,390 should be capitalized over the three years.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18 views3 pages

    Question 1 Alma Limited-Eng

    Uploaded by

    chad sampson
    The document discusses the capitalization of borrowing costs for a company, Alma Limited, over three years based on two assumptions: 1) Loans were incurred specifically for construction of an asset. Under this assumption, borrowing costs of R312,000 should be capitalized over the three years. 2) Financing was from general sources not specifically tied to construction. Under this assumption, borrowing costs of R286,390 should be capitalized over the three years.

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    FINANCIAL ACCOUNTING 278

    IAS 23 BORROWING COSTS

    QUESTION 1

    The following information on Alma Limited is available:

    Year 1 Year 2 Year 3 Total


    R R R R
    Table 1:
    Interest paid on:

    Average bank overdraft


    R1 800 000 @ 26% p.a. 468 000 - - 468 000
    R1 200 000 @ 18% p.a. - 216 000 216 000 432 000

    Loans incurred
    R800 000 @ 24% p.a. 192 000 192 000 - 384 000
    R1 200 000 @ 16% p.a. - - 192 000 192 000
    660 000 408 000 408 000 1 476 000

    Table 2:
    Interest received on surplus funds of loan 165 000 108 000 - 273 000

    Table 3:
    Expenditures incurred during the year
    (Evenly) 100 000 400 000 1 500 000 2 000 000

    Assumptions

    1. Interest is paid at the end of each year from own funds.

    2. Loans are redeemed at the end of a year and incurred at the beginning of a year.

    3. All interest is compounded annually.

    REQUIRED

    (a) Assume that the loans were incurred specifically for the construction of the asset. Any
    shortages are funded from the bank overdraft. Calculate the borrowing costs that should be
    capitalised.

    (b) Calculate the borrowing costs that must be capitalised if you assume that the financing was
    not specifically incurred for the construction of the asset.
    FINANCIAL ACCOUNTING 278
    IAS 23 BORROWING COSTS

    QUESTION 1 (Suggested solution)

    (a) Loan incurred specifically Capitalise

    #Determine annually if specific loan is sufficient to cover average expenditure

    Year 1: 100 000/2 < 800 000


    Specific sufficient

    Interest paid – Interest received


    (192 000 - 165 000) 27 000

    Year 2: 100 000 + 400 000/2 = 300 000 < 800 000
    Specific sufficient

    Interest paid – Interest received


    (192 000 - 108 000) 84 000

    Year 3: 100 000 + 400 000 + 1 500 000/2


    = 1 250 000 > 1 200 000

    Specific not sufficient anymore

    Interest paid – Interest received 192 000


    (192 000 - 0)

    As well as:

    Expenditure x Capitalisation rate


    (1 250 000 - 1 200 000) x 18% 9 000
    201 000
    Note: Yr 3, R9000 limited to R216 000

    Total capitalised over 3 years = R312 000


    (b) General finance

    Year 1:

    Borrowing cost capitalised = Average expenditure x capitalisation rate x period


    = (100 000/2) x 25.38% (a) x 1
    = 12 690

    Year 2:

    Borrowing cost capitalised = Average expenditure x capitalisation rate x period


    = (100 000 + (400 000/2)) x 20.40% (b) x 1
    = 61 200

    Year 3:

    Borrowing cost capitalised = Average expenditure x capitalisation rate x period


    = (500 000 + (1 500 000/2)) x 17.0% (c) x 1
    = 212 500

    (a): 660 000/(1 800 000 + 800 000) x 100 = 25.38%


    (b): 408 000/(1 200 000 + 800 000) x 100 = 20.40%
    (c): 408 000/(1 200 000 + 1 200 000) x 100 = 17.00%

    Note: Control each year: borrowing costs capitalised may not exceed actual general
    interest

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