Question

17) x ltd. began construction of a new building on ist jan, 2012. It obtained 21 lakh special loan to finance the Construction of the building on 1stjau, 2012 at an interest rate lot.. The Companyly other outstanding two nour specific loans were: Amount Rate of Interest 5,00,000 rupees llt. 19,00,000 rupees | Bt. The expenditures that were made on the building project were as follows: Rufeel Jan 2012 2,000,000 1 April 2012 12,50,000 July 2012 (4,50,000 Dec 2012 11,20,000 Building was completed by 31st Dec, 2012 calculate the amount of interest to be capitalized & pass One journal entry for Capitaliting the Cost & borrowing Cost in respect of the building.

Answer 1

Interest to be capitalized is = Interest on Specific borrowings and Interest on General borrowings The capitalisation rate relating to general borrowings is the weighted average of the borrowing costs applicable to the entity's borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Weighted average borrowing cost = ((500000/1400000)*11%)+((900000/1400000)*13%) Weighted average borrowing cost = 12.28571% Weighted average borrowing cost = 12.29% Rounded to two decimals Determination of weighted average expenditure :- Amount Weighted for period Expenditure allocated to Month Incurred general outstanding borrowings 100,000 91,667 Jan-12 200,000 Apr-12 250,000 250,000 166,667 Jul-12 450,000 450,000 187,500 120,000 Dec-12 120,000 1,020,000 445,833 On Jan 2012, expenditure to an extent of 100,000 is allocated to specific borrowing. Borrowing cost to be capitalized is :- Interest related to specific loan (100000*10%) 10,000 Interest related to General borrowings (445833*12.29%) 54,793 Total interest to be capitalized 64,793

Journal entries :- Accounts Title & Explanation Credit $ Debit $ Date 31-Dec-12 Building (1020000+64793) 1,084,793 To Construction work in progress 1,020,000 To Interest Payable 64,793 (Entry for recording capitalisation of building with interest)