During the year ended 31 December 2016, XYZ Ltd started the construction of its
ID: 2577453 • Letter: D
Question
During the year ended 31 December 2016, XYZ Ltd started the construction of its office building. It is expected that the construction will take three years to complete. On 1 February 2016, XYZ Ltd borrowed $850,000 at 6% per annum specifically to finance this construction project. Furthermore, XYZ has had the following general borrowings throughout the year 2016:
Loan Principal
$’000
Interest for the year
$’000
XYZ Ltd incurred the following expenditures in 2016 for this project:
The accounting policy of XYZ Ltd requires the company to use up specific borrowings before using general borrowings to finance its projects.
Required:
a Determine the capitalization rate for the general borrowings. Show your workings. (5 marks)
b Calculate the interest eligible for capitalization on the construction project as at year end 31 December 2016 and journalize the required entries. Show your workings. (12 marks)
c What disclosures should be prepared for borrowing costs under HKAS 23 (Revised)? (5 marks)
d Suppose the construction work was suspended for two months in 2016 due to an industrial accident. How should XYZ Ltd account for the borrowing costs? (3 marks)
Loan Principal
$’000
Interest for the year
$’000
Loan A 10,000 1,000 Loan B 8,000 720 Loan C 5,000 430Explanation / Answer
Loan Principal Interest for the year $’000 Loan A 10,000 1,000 Loan B 8,000 720 Loan C 5,000 430 Total 23,000 2,150 ans a Capitalization rate=2150/23000*100 9.35 % ans b Date Exp Months wgt exp 1-Mar 1500000 10/10 1500000 1-Jul 2400000 6/10 1440000 1-Dec 1800000 1/10 180000 Total 3120000 Capitalization of interest 850000*6%*10/11 46364 (3120000-850000)*9.35%*10/11 192950 Capitalization of interest 239314 Dr Cr Qualifying Asset 239314 Interest expenses 239314 If interest aret is not rounded off Capitalization of interest 850000*6%*10/11 46364 (3120000-850000)*9.35%*10/11 192905 Capitalization of interest 239269 Dr Cr Qualifying Asset 239269 Interest expenses 239269 ans 3 The entity has to disclose the amt of borrowing cost for the period and also the capitalization rate which is used to determine amt of borrowing cost which is eligible for capitalization rate ans 4 Date Exp Months wgt exp 1-May 1500000 8/8 1500000 1-Jul 2400000 6/8 1800000 1-Dec 1800000 1/8 225000 Total 3525000 Capitalization of interest 850000*6%*10/11 46364 (3525000-850000)*9.35%*10/11 227375 Capitalization of interest 273739 Dr Cr Qualifying Asset 273739 Interest expenses 273739
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