Question

Question 4 (30 marks) Sunlight Property Development Limited (Sunlight) is a company which acquires and develops significant properties. The company holds a diversified property portfolio, including hotels, office buildings, and leisure centres. Some of these properties are used by the company for providing services or for administrative purpose, while some of them are for rental purpose. One of the commercial buildings, namely Building A, will be redeveloped into a 50-storey office tower (the construction project). The construction is expected to take two years to complete. Construction activities commenced immediately on 1 July 2018. The following expenditure was incurred in year ended 30 June 2019: Payment date 1 July 2018 1 November 2018 1 February 2019 30 June 2019 Amount HK$ 000 20,000 26,000 18,000 16,000 80,000 On 1 July, 2018, Sunlight obtained the following borrowings from the bank: • 5% HKS 40 million 4-year loan note with simple interest payable annually, which is used specifically to finance the construction project. The HKS 40 million was put on deposit before payments were made to the contractor, during which time interest income of HKS 500,000 was earned. 7.5% HKS 20 million 15-year loan note which is part of a pool of general borrowings, on which simple interest is payable annually, and the amount of capital remained unchanged during the year. 10% HKS 40 million 4-year loan note which is part of a pool of general borrowings, on which simple interest is payable annually, and the amount of capital remained unchanged during the year. The construction activities have been suspended in May 2019 for almost three weeks due to flooding which is unfortunately a common

Answer 1

(a)	Calculation of total borrowing cost incurred during the year ended 30th June, 2019
		Particulars		Calculation	Amount
		5% HK $ 40 Million Loan		40,000,000 * 5%	2,000,000.00
		7.5% HK $ 20 Million Loan		20,000,000 * 7.5%	1,500,000.00
		10% HK $ 40 Million Loan		40,000,000 * 10%	4,000,000.00
					7,500,000.00
	Calculation of Borrowing cost eligible for capitalzation
	Expenditures incurred in obtaining a qualifying asset are first allocated to any specific borrowings. The remaining expenditures are allocated to any general borrowings
		Amt(HK $)	Months	Amount Allocated to general Borrowings	Weighted for period outstanding	Amount
	1-Jul-18	20,000,000.00	12	0	0
	1-Nov-18	26,000,000.00	8	6,000,000.00	6,000,000 x 8/12 =	4,000,000.00
	1-Feb-19	18,000,000.00	5	18,000,000.00	18,000,000 x 5/12 =	7,500,000.00
	30-Jun-19	16,000,000.00	0	16,000,000.00	-
		80,000,000.00				11,500,000.00
	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.
		20,000,000.00	7.50%	1,500,000.00
		40,000,000.00	10%	4,000,000.00
		60,000,000.00		5,500,000.00
		WACR	9%	(5500000/60000000)
	Hence Borrowings to be capitalised:
	Specific Borrowings
		40,000,000.00	5%	2,000,000.00
		Less: Income on temporary iNvest.		(500,000.00)
				1,500,000.00
	General Borrowings
		11,500,000.00	9%	1,054,166.67
		Total Borrowing cost to be capitalised		2,554,166.67
	Note:	As per para 21 of the HKAS 21, An entity also does not suspend capitalising borrowing costs when a temporary delay is a
		necessary part of the process of getting an asset ready for its intended use or sale. Hence suspension of 3 weeks will not effect capitalization process.
(b)	As per para 8 of HKAS 23 - Borrowing Cost An entity shall capitalise borrowing costs that are directly attributable to the acquisition,
	construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them.
	Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of that asset. Such borrowing
	Costs are capitalised as part of the cost of the asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably
	Hence based on the above provisions, Out of total borrowing Cost of HK $ 7,500,000, HK $ 2,554,166.67 shall be capitalised with the cost of the assets and remaining amount will
	be charged to Statement of profit and loss during the year.
(C )	Building A A/c Dr.		2,554,166.67
	To, Finance Cost			2,554,166.67
	(Being expense capitalised)
(d)	Calculation of the carrying amount of the Building
		Expenses incurred		80,000,000.00
		Add: Borrowing Cost		2,554,166.67
				82,554,166.67