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Borrowing Costs: Use The Following Information For The Next Two Questions

This document discusses the capitalization of borrowing costs under PAS 23. It provides examples to illustrate how to calculate the amount of borrowing costs eligible for capitalization. Specifically: 1) Borrowing costs must relate directly to a qualifying asset, be material, and expected over more than one period to be capitalized. 2) For the example provided, ₱920,000 of borrowing costs were eligible for capitalization based on computations shown. 3) The total cost of the qualifying asset was ₱14,920,000, which included capitalized borrowing costs of ₱920,000 added to total construction expenditures.

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16K views3 pages

Borrowing Costs: Use The Following Information For The Next Two Questions

This document discusses the capitalization of borrowing costs under PAS 23. It provides examples to illustrate how to calculate the amount of borrowing costs eligible for capitalization. Specifically: 1) Borrowing costs must relate directly to a qualifying asset, be material, and expected over more than one period to be capitalized. 2) For the example provided, ₱920,000 of borrowing costs were eligible for capitalization based on computations shown. 3) The total cost of the qualifying asset was ₱14,920,000, which included capitalized borrowing costs of ₱920,000 added to total construction expenditures.

Uploaded by

Xiena
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Page |1

Chapter 19
Borrowing Costs

1. According to PAS 23, borrowing costs are capitalized when


a. they relate directly to the acquisition, construction or production of a qualifying asset.
b. the entity chooses to capitalize them.
c. they are material and are expected to be incurred over more than one reporting period.
d. all of these

2. Which of the following is a qualifying asset?


a. Investment property measured at fair value
b. Building that is ready for its intended use upon purchase
c. Inventories that are routinely produced in large quantities on a continuous basis
d. An application software (intangible asset) that takes 3 years to develop

3. An entity starts the capitalization of borrowing costs to the cost of a qualifying asset when
a. expenditures for the asset are being incurred.
b. borrowing costs are being incurred.
c. activities necessary to prepare the asset for its intended use or sale are being undertaken.
d. all of the above conditions are met.

4. In which of the following instances is the capitalization of borrowing costs under PAS 23 would
most likely be suspended?
a. Construction is temporarily stopped for the curing of concrete.
b. Active development is stopped to give time for the engineers to reevaluate a design flaw.
c. The construction of a bridge is disrupted by troubled waters.
d. The construction of a building is discontinued because it is condemned by the government.
The resumption of development is uncertain.

Use the following information for the next two questions:


On January 1, 20x1, Entity A had the following general borrowings. A part of the proceeds was used
to finance the construction of a qualifying asset:
Principal
12% bank loan (1.5 years) ₱ 1,000,000
10% bank loan (3-year) 8,000,000

Expenditures made on the qualifying asset were as follows:


Jan. 1 ₱ 5,000,000
March 1 4,000,000
August 31 3,000,000
December 1 2,000,000

Construction was completed on December 31, 20x1.

5. How much borrowing costs are capitalized to the cost of the constructed qualifying asset?
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a. 1,045,000 c. 1,026,667
b. 971,111 d. 920,000

6. How much is the cost of the qualifying asset on initial recognition?


a. 13,010,000 c. 14,920,000
b. 15,045,000 d. 14,971,111

7. PAS 23 does not require which of the following disclosures?


a. The amount of borrowing costs capitalized during the period.
b. The capitalization rate used to determine the capitalizable borrowing costs.
c. Separate presentation of qualifying assets from other assets either on the face of the
statement of financial position or in the notes.
d. PAS 23 requires the disclosure of all of these information.

“Trust in the Lord with all your heart and lean not on your own understanding; in all your ways acknowledge
him, and he will make your paths straight.” (Proverbs 3:5-6)

- END -
Page |3

SOLUTIONS:

1. A
2. D
3. D
4. D

5. D Solution:
The average expenditure is computed as follows:
Month outstanding over
Date Expenditures Average expenditure
12 Months
  (a) (b) (c)= (a) x (b)
Jan.1 5,000,000 12/12 5,000,000
Mar. 1 4,000,000 10/12 3,333,333
Aug. 31 3,000,000 4/12 1,000,000
Dec. 1 2,000,000 1/12 166,667
9,500,000

The capitalization rate is computed as follows:

Total interest expense on general borrowings


Capitalization rate =
Total general borrowings

Total interest expense on general borrowings


(1M x 12%) + (8M x 10%) 920,000
Divide by: Total general borrowings (1M + 8M) 9,000,000
Capitalization rate 10.22%

Capitalizable BC from formula = 9,500,000 x 10.22% = 971,111

971,111 vs. 920,000 actual borrowing costs = Capitalizable BC is 920,000, the lower amount

6. C (5M + 4M + 3M + 2M total expenditures on construction) + 920,000 capitalizable borrowing


costs = 14,920,000

7. C

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