ExpertMedium2 marksMultiple Choice
ACCA · Question 14 · Financial Reporting
Section A
EcoResort Developers took out a $4,000,000 specific bank loan on 1 February 20X3 at an interest rate of 6% per annum to fund the construction of a new eco-lodge. Construction began on 1 March 20X3. The surplus funds were temporarily invested, earning interest of $15,000 during February and $10,000 during March. Construction was completed on 30 November 20X3.
What amount of borrowing costs should be capitalized as part of the cost of the eco-lodge for the year ended 31 December 20X3?
Section A
EcoResort Developers took out a $4,000,000 specific bank loan on 1 February 20X3 at an interest rate of 6% per annum to fund the construction of a new eco-lodge. Construction began on 1 March 20X3. The surplus funds were temporarily invested, earning interest of $15,000 during February and $10,000 during March. Construction was completed on 30 November 20X3.
What amount of borrowing costs should be capitalized as part of the cost of the eco-lodge for the year ended 31 December 20X3?
Answer options:
A.
$180,000
B.
$170,000
C.
$155,000
D.
$220,000
How to approach this question
Determine the capitalization period (starts when activities begin, ends when completed). Calculate interest for this period. Deduct any investment income earned on the specific loan during this exact period.
Full Answer
B.$170,000✓ Correct
Capitalization commences on 1 March 20X3 (when construction begins) and ceases on 30 November 20X3 (when completed), a period of 9 months.
Interest to capitalize = $4,000,000 × 6% × 9/12 = $180,000.
Investment income to deduct is only the income earned during the capitalization period (March) = $10,000.
Net borrowing costs capitalized = $180,000 - $10,000 = $170,000.
Common mistakes
Deducting the February investment income or capitalizing interest from February.
Practice the full ACCA FR — Financial Reporting Practice Exam 6
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