Page 36 - FR Integrated Workbook 2018-19

Chapter 2

Example 4

Borrowing costs
Grimtown took out a $10 million 6% loan on 1 January 20X1 to build a new
football stadium. Not all of the funds were immediately required so $2 million
was invested in 3% bonds until 30 June 20X1.
Construction of the stadium began on 1 February 20X1 and was completed on
31 December 20X1.

Calculate the amount of interest to be capitalised in respect of the
football stadium as at 31 December 20X1.

Borrowing costs should only be capitalised from 1 February 20X1, when the
construction begins.

$000

Total interest charge for the year $10m × 6% 600
Less interest charged to profit or loss 1/12 (January) (50)
–––––

Interest to be capitalised 550
–––––

In relation to the income earned, a similar situation applies. January's interest
is earned before construction begins. Therefore this is taken as finance
income to the statement of profit or loss, with the other 5 months relating to
the asset.

$000
Total interest earned on investment $2m × 3% × 6/12 30
Less interest earned to profit or loss 1/6 (January) (5)

–––––
Interest to be deducted from asset 25

–––––
The total that can be capitalised is the net interest incurred during the
construction period, which will be $550,000 – $25,000 = $525,000
The statement of profit or loss will include finance cost of $50,000 and
investment income of $5,000.

30