Entity A has the following loan finance in place during the year: $2,560,000 of 7% loan...
Entity A has the following loan finance in place during the year:
- $2,560,000 of 7% loan finance
- $3,550,000 of 9% loan finance
Entity A constructed a new factory which cost $4,655,000 and this was funded out of the existing loan finance. The factory took 9 months to complete within the same reporting year.
REQUIRED:
Measure the borrowing costs should be capitalised
Homework Answers
Answer : Borrowing costs should be capitalized = $284,886
Explanation:
| Loan Finance | Interest |
| $2,560,000 | $2,560,000 * 7 % = $179,200 |
| $3,550,000 | $3,550,000 * 9 % = $319,500 |
| $6,110,000 | $498,700 |
Weighted average rate = $498,700 / $6,110,000 = 8.16%
Borrowing costs should be capitalized = Constrution cost * Weighted average rate * 9 /12
= $4,655,000 * 8.16% * 9 /12
= $284,886.
Note : In absence of information , the weighted average rate is rounded off to two decimals places.
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