INTERMEDIATE ACCOUNTING 2
CJEZEREI D. VERDADERO BSA 2
BORROWING COST
(CHAPTER 25)
PROBLEM 25-6(AICPA ADAPTED)
Chum company started construction of a new office building on January 1 2020 and move into
the finished building on July 1 2021.
Of the P25,000,000 total cost of the building, P20,000,000 was incurred in 2020 evenly
throughout the year.
The entity's incremental borrowing rate was 12% throughout 2020, and the total amount of
interest incurred was P1,020,000.
What amount should be reported to capitalized interest on December 31 2020?
a. 1,020,000
b. 1,200,000
c. 1,500,000
d. 2,400,000
SOLUTION:
Average Expenditure 10,000,000
Capitalization rate x 12%
Interest 1,200,000
However, as per PAS 23, paragraph 14 the capitalizable borrowing costs shall not exceed
the actual interest incurred, which in this case is 1,020,000
PROBLEM 25-7 (PHOLCPA Adapted)
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 for general purposes.
The loan is to repaid commencing the month following completion of the building.
Expenditures for the completed structure totaled P10,000,000 during the year ended December
31 2020. This expenditures were incurred evenly throughout the year.
The entity and interest of P200,000 for the year on the unexpected 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
2. What is the interest expense for 2020?
a. 1,800,000
b. 1,200,000
c. 1,600,000
d. 1,000,000
SOLUTIONS:
1. Average Expenditure: 10,000,000/2 = 5,000,000
5,000,000 x 12% = 600,000
2. Borrowing 15,000,000
Rate x 12%
Interest Expense 1,800,000
Capitalized Interest (600,000)
Interest Expense, 2020 1,200,000
PROBLEM 25-8(IAA)
The third year of construction project of Jamborees Company began with a P3,000,000 balance
in construction in progress. Included in the figure is P600,000 of interest capitalized in the first
two years.
Construction expenditures during the third year totaled P8,000,000 which was incurred evenly
throughout the entire year.
The entity has over P30,000,000 in the interest-bearing outstanding in the third year at a
weighted average rate of 9%
What amount of interest for the third year is capitalized?
a. 360,000
b. 630,000
c. 936,000
d. 990,000
SOLUTION:
Average Expenditure, 3rd year 4,000,000
Accumulated expenditures 3,000,000
Total Cost 7,000,000
Rate x 9%
Capitalizable Interest 630,000
PROBLEM 25-9 (IAA)
Jugular Company started construction on a building on January 1 of the current year and
completed construction on December 31 of the same year.
the entity has only two interest bearing notes outstanding during the year, in both of these
notes were outstanding for all 12 months of the year.
The following information is available:
Average accumulated expenditures 2,500,000
Ending balance in construction in progress before capitalization of interest 3,600,000
6% note incurred specifically for the project 1,500,000
9% long-term note 5,000,000
What is the total cost of the building?
a.3,780,000
b.3,650,000
c.3,750,000
d.3,825,000
SOLUTION:
Average Expenditure 2,500,000
Attributable to Specific (1,500,000)
Attributable to General 1,000,000
Specific: 1,500,000 x 6% 90,000
General: 1,000,000 x 9% 90,000
Ending balance 3,600,000
Total Cost 3,780,000
PROBLEM 25-10 (IFRS)
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 in 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 the three sources and
use the extra P5,000,000 for 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, there 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 costs 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:
Bank term loan 5,000,000 x 7% 350,000
Institutional 10,000,000 x 8% 800,000
Corporate Bonds 10,000,000 x 9% 900,000
Total 25,000,000 2,050,000
2,050,000 / 25,000,000 = 8.2%
20,000,000 x 2(years) x 8.2% = 3,280,000
PROBLEM 25-11 (IAA)
Moses company borrowed P4,000,000 on a 10% note payable to finance a new warehouse
which the entity is constructing for own use.
The only other debt of the entity is a P6,000,000 , 12% mortgage payable on an office building
At the end of the current year, average accumulated expenditures on how new warehouse
totaled P4,750,000.
What amount of interest should be capitalized for the current year?
a. 400,000
b. 475,000
c. 490,000
d. 522,500
SOLUTION
Average Expenditure 4,750,000
Appli. To Specific (4,000,000)
Appli. To General 750,000
Specific: 4,000,000 x 10% 400,000
General: 750,000 x 12% 90,000
Capitalazable Costs 490,000
PROBLEM 25-12(IAA)
During 2020, Israel Company constructed asset costing P4,215,000 . The weighted average
accumulated expenditures on the asset during the current year amounted to P3,900,000.
The entity borrowed P2,000,000 at 7.5% on January 1 2020. Funds not needed for construction
were temporarily invested in short-term securities and earned P59,000 in interest revenue.
In addition to the construction loan, the entity had to other notes outstanding during the year, a
P1,500,000.10 year ,10% note payable dated October,1 2019, in a P1,000,000. 8% note payable
data November,2, 2019.
What amount of interest should be capitalized during 2020?
a. 324,800
b. 297,500
c. 273,000
d. 265,800
SOLUTION:
Borrowing A: 1,500,000 x 10% 150,000
Borrowing B: 1,000,000 x 8% 80,000
Total 2,500,000 230,000
Rate: 230,000/2,500,000 = 9.2%
Specific: 2,000,000 x 7.5% 150,000
Interest Revenue (59,000)
General: 1,900,000 x 9.2% 174,800
Capitalizable Cost 265,800
PROBLEM 25-13 (IFRS)
Demure Company commenced construction of a new plant on February,1 2020 and was funded
from existing general borrowings.
The construction was completed on September,30 2020. The borrowings outstanding during the
current year comprised.
Bank A – 6% 8,000,000
Bank B – 6.6% 10,000,000
Bank C – 7% 30,000,000
1. What amount of borrowing cost should be capitalized?
a. 1,215,000
b. 2,100,000
c. 3,240,000
d. 810,000
2. What is the interest expense of the current year?
a. 2,430,000
b. 3,240,000
c. 2,160,000
d. 1,350,000
SOLUTION:
1. Bank A: 8,000,000 x 6% 480,000
Bank B: 10,000,000 x 6.6% 660,000
Bank C: 30,000,000 x 7% 2,100,000
Total: 48,000,000 3,240,000
Average Interest: 3,240,000/48,000,000 = 6.75%
Capitalizable: 18,000,000 x 8/12 x 6.75% = 810,000
2. Total Interest 3,240,000
Interest Capitalized (810,000)
Interest Expense 2,430,000
PROBLEM 25-14 (AICPA Adapted)
During 2020, Elijah Company constructed and new building at a cost of P30,000,000.
The expenditures for the building which was finished late in 2020 were incurred evenly during
the year.
The entity had the following laws of standing on December 31, 2020:
10% note to finance specially the construction, dated January 1,2020, P10,000,000. The
note is unpaid on December 31 2020.
Investments were made on the proceeds from the loan and income of P100,000 was
realized in 2020.
12% 10-year bonds issued at face amount on April 30 2019, P30,000,000.
8% 5- year note payable, March 1 2019, P10,000,000.
1. is the capitalized borrowing cost?
a. 1,550,000
b. 1,450,000
c. 1,400,000
d. 1,500,000
2. What is the interest expense for 2020?
a. 4,400,000
b. 2,850,000
c. 3,850,000
d. 2,950,000
SOLUTIONS:
1. Average expenditures (30,000,000/2) 15,000,000
Applicable to specific loan (10,000,000)
Applicable to general loan 5,000,000
Principal Interest
12% 10-year bonds payable 30,000,000 3,600,000
8% 5-year note payable 10,000,000 800,000
Total general borrowing 40,000,000 4,400,000
Average capitalizable rate: 4,400,000/40,000,000 = 11%
Interest on specific borrowing (10% x 10,000,000) 1,000,000
Interest income (100,000)
Interest on general borrowing (11% x 5,000,000) 550,000
Capitalizable borrowing cost 1,450,000
2. Total General Borrowing 4,400,000
Capitalized Borrowing Cost 550,000
Interest Expense, 2020 3,850,000
PROBLEM 25-15 (IAA)
On June 1, 2020 ,Circus Company began construction of a 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. The
loan was outstanding through the end of October 2021.
The only other interest bearing debt was a long-term note for P15,000,000 with an interest rate
of 8%.
This note was outstanding during 2020 and 2021. The fiscal year end in December 31.
1. What amount of interest should be capitalized in 2020?
a. 210,000
b. 195,000
c. 390,000
d. 420,000
2. What amount of interest should be capitalized in 2021?
a. 1,000,000
b. 1,350,000
c. 700,000
d. 733,000
3. What is the interest expense for 2021?
a. 1,200,000
b. 1,270,000
c. 887,000
d. 537,000
SOLUTIONS:
1.
Expenditure Fraction Average
July 1, 2020 5,000,000 x 6/6 5,000,000
October 1, 2020 3,000,000 x 3/6 1,500,000
Average expenditures in 2020 6,500,000
Capitalizable interest (6,500,000 x 6% x 6/12) 195,000
No general borrowing was used because Average Expenditures did not exceed 7,000,000
2.
July 1, 2020 5,000,000
October 1, 2020 3,000,000
Actual expenditures for 2020 8,000,000
Capitalizable interest for 2020 195,000
*Cost incurred to December 31, 2020 8,195,000
*January 1, 2021 (8,195,000 x 10/10) 8,195,000
February 1, 2021 (3,000,000 x 9/10) 2,700,000
April 1, 2021 (2,000,000 x 7/10) 1,400,000
September1, 2021 ( 2,000,000 x 2/10) 400,000
October 1,2021 ( 500,000 x 1/10) 50,000
Average expenditures in 2021 12,745,000
Average expenditures in 2021 12,745,000
Applicable to specific loan ( 7,000,000)
Applicable to general loan 5,745,000
Specific (7,000,000 x 6% x 10/12) 350,000
General (5,745,000 x 8% x 10/12) 383,000
Capitalizable borrowing cost: 733,000
3.
Total interest incurred in 2021
Interest on specific (7,000,000 x 6%) 420,000
Interest on general (15,000,000 x 8%) 1,200,000 1,620,000
Capitalizable in 2021 ( 733,000)
Interest expense for 2021 887,000
