Question

Voodoo Limited is a manufacturing company that prepares its financial statements to 31 December each year. Before the financial statements for the year ended 31 December 2018 can be finalised, a number of outstanding issues need to be resolved. Issue 1: In January 2018, Voodoo Limited commenced a programme to extend and modernise the company's manufacturing facilities. The programme cost £2,500,000 and Voodoo Limited financed the work through a mixture of general and specific debt. The directors estimate that 60% of the programme was financed by general debt and 40% by specific debt. Voodoo Limited's current general borrowing rate is 10% per annum while the specific debt carries an interest rate of 15% per annum. The programme was completed in December 2018.

The company prepares it's financial statements to 31 December each year.What are the accounting implications of the issue above? Can you also clearly show any accounting adjustments required?

Don't answer. It's a duplicate question.

Answer 1

Programme Cost = 25,00,000

General Debt = 60 % , General Borrowing Interest Rate = 10%

Specific Debt = 40% , Specific Borrowing Interest Rate = 15%

While preparing the Financial statement of Voodoo Limited for the year end 31 December 2018, Voodoo Limited has to take the following Accounting Implications :

1. Voodoo limited has to take the interest expense of General and Specific Borrowings in its Profit and Loss Account.

2. If programme Cost is for an Qualifying Assest then the Interest cost has to be Capitalised.

Accounting adjustment :

Calculation of Interest Expense:

General Interest : 25,00,000 * 60% *10% = 1,50,000

Specific Interest : 25,00,000 * 40% *15% = 1,50,000

Total Interest : 3,00,000 (1,50,000 + 1,50,000)