Lecture # 36
Chapter # 03
Borrowing Cost
IAS-23
Borrowings
Specific Borrowing General Borrowing
Rules for Commencement of Rules for Commencement of
Borrowing Cost Capitalisation Borrowing Cost Capitalisation
Later of; Date of Payment
• Borrowing Cost incurred (Loan for Qualifying asset
generated) from General Borrowing
• Qualifying asset’s activity started
• First Payment for Qualifying asset
Suspension of Borrowing Cost Suspension of Borrowing Cost
Capitalisation Capitalisation
For Period of Unroutine Suspension For Period of Unroutine Suspension
Cessation of Borrowing Cost Cessation of Borrowing Cost
Capitalisation Capitalisation
• Work Completed • Work Completed
• Accounting Year-end • Accounting Year-end
• Investment Income will be • Investment Income will not be
adjusted for Capitalisation Period adjusted for Capitalisation Period
Question # 07 Page # 338:
For the purpose of construction of qualifying asset during the year ending
December 2014, Ahmed limited decided to utilize various funds available to
them. The details of funds available to Ahmed ltd. are as follows:
Type of loan Amount Interest rate Loan taken on Loan repaid on
General purpose loan A 900,000 12% 01-01-2013 31-12-2014
General purpose loan B 560,000 15% 01-01-2014 30-09-2014
General purpose loan C 780,000 10% 01-01-2014 30-11-2014
General purpose loan D 690,000 17% 01-01-2012 30-07-2014
Shareholders’ equity 1,000,000 20% 01-07-2005 Not repaid up to 31-12-2014
Required:
You are required to calculate the capitalization rate to be used for calculating
the amount of borrowing cost to be capitalized.
Question # 06 Page # 330:
The following is the information regarding general loans available to Power limited:
Type of Loan Amount Interest rate Loan taken on Load repaid on
A 200,000 20% 1-March-2013 30-June-2016
B 500,000 25% 1-March-2015 30-June-2018
C 100,000 18% 1-March-2016 30-September-2016
D 70,000 12% 1-Feb-2016 28-February-2019
Required: Calculate capitalization rate for year ended 31December 2016?
Question # 07 Page # 330:
Continuing from question 6 following construction data is provided for year ended 31 December 2016:
Commencement of project 1 April 2016
Cessation of project 30 November 2016
The payments made to the contractor were as follows:
1 April 2016 300,000
1 June 2016 100,000
1 November 2016 30,000
Surplus funds are invested @ 5% per annum.
Required:
Calculate borrowing cost to be capitalized for year ended December 31, 2016?
Question # 17 Page # 342:
In the board meeting held on 15th December 2006, management of Power limited decided to construct a qualifying
asset amounting to Rs. 1,000,000. The management of Power limited approached to a bank to finance the project
but the bank agreed to finance only the 50% of the estimated cost i.e. Rs. 500,000 @ 15% p.a. The loan was
sanctioned on 28th December 2006 and was immediately put into the bank account of company. Management of
the company decided to utilize other general purpose loans to finance the remaining balance of Rs. 500,000.
The construction of qualifying asset started on 1st January 2007. Following is the schedule of payments made by
Power limited in connection with the construction of qualifying asset.
Management decided to invest the unutilized portion of Date of installment Amount of installment (Rs.)
specific loan in the government securities fetching an
January 1, 2007 200,000
income @ 8% p.a. There was an un-routine stoppage in
the work from 1st June 2007 to 31st July 2007. April 1, 2007 200,000
The following is the information regarding all the loans July 1,2007 200,000
available to Power limited: October 1,2007 200,000
The general purpose loan 2 was repaid in full on 30.11.07
and general purpose loan 3 was repaid in full on 31.10.07. Description Amount Rate Loan taken On
Remaining loans were outstanding till 31.12.07. Specific loan 500,000 15% 28-12-2006
The construction of qualifying asset was not completed
General purpose loan 1 600,000 12% 01-02-2007
up to 31.12.07. The accounting year ends on 31.12.07.
Required: General purpose loan 2 400,000 14% 01-03-2007
Calculate portion of borrowing cost eligible for General purpose loan 3 300,000 14% 01-01-2007
capitalization for the year ended December 2007.
