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Lecture # 37

The document discusses borrowing costs related to a construction project. It provides details of payments made for construction, loans taken for the project, and interest rates. It requires calculating the borrowing costs to be capitalized according to accounting standards.

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Hussain
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24 views

Lecture # 37

The document discusses borrowing costs related to a construction project. It provides details of payments made for construction, loans taken for the project, and interest rates. It requires calculating the borrowing costs to be capitalized according to accounting standards.

Uploaded by

Hussain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Lecture # 37

Chapter # 05

Borrowing Cost

IAS-23
Question # 05 Page # 359 (Autumn-09 Q # 04-18 Marks):
On September 1, 2008, Spin Industries Limited (SIL) started construction of its new office building and completed
it on May 31, 2009. The payments made to the contractor were as follows:

In addition to the above payments, SIL paid a fee of Rs. 8 Date of Payment Rupees
million on September 1, 2008 for obtaining a permit fee September 1, 2008 10,000,000
allowing the construction of the building. December 1, 2008 15,000,000
The project was financed through the following sources: February 1, 2009 12,000,000
(i) On August 1, 2008 a medium term loan of Rs. 25 million June 1, 2009 9,000,000
was obtained specifically for the construction of the building. The loan carried mark up of 12% per annum
payable semi-annually. A commitment fee @ 0.5% of the amount of loan was charged by the bank.
Surplus funds were invested in savings account @ 8% per annum. On February 1, 2009 SIL paid the six monthly
interest plus Rs. 5 million towards the principal.
(ii) Existing running finance facilities of SIL running finance facility of Rs. 28 million from Bank A carrying mark
up of 13% payable annually. The average outstanding balance during the period of construction was Rs. 25
million. Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the period of
construction was Rs. 3 million and the average running finance balance during that period was Rs. 20 million.
Required:
Calculate the amount of borrowing costs to be capitalized on June 30, 2009 in accordance with the requirements
of International Accounting Standards.
Question # 01 Page # 357 (Spring-22 Q # 01-08 Marks):
Bulan Pakistan Limited (BPL) is planning to commence construction of a warehouse on 1 January 2023 and is expecting to
complete it by 30 November 2023. The management wants to ascertain the borrowing costs that can be included in the cost of
warehouse. Relevant details in this respect are as follows:
(i) Expected payments related to the construction of the warehouse will be as follows:
(ii) The project can be financed through the following sources:
Description Date of payment Rs. in million
→ Specific loan of Rs. 350 million at the rate of 16% per
1st bill of contractor 1-Feb-23 40
annum to be obtained on 01.01.23. The principal will
2nd bill of contractor 1-Apr-23 120
be payable in 5 equal annual instalments along with
3rd bill of contractor 1-Sep-23 100
interest, from 01.01.24. Last bill of contractor 1-Dec-23 90
→ Withdrawals to be made from existing running finance 350
facilities. These facilities will also be used to finance other
needs of BPL. Details of these facilities are as follows: Expected average
Limit Interest
(iii) The surplus funds available from the loan will be invested in Name of bank balance for 2023
rates
a saving account at 10% per annum. ------ Rs. in million ------
Bank A 300 220 13.7%
(iv) The construction work is expected to be suspended for the
Bank B 350 280 14.6%
entire month of June 2023 due to usual monsoon rains.
Required:
Calculate the borrowing costs to be capitalised in the cost of warehouse in each of the following independent cases:
(a) if all the payments will be made from the specific loan only. (04)
(b) if all the payments will be made from running finance facilities only. (04)

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