To determine the amount of borrowing costs to be capitalized and expensed, we need to calculate the weighted average borrowing cost and then apply it to the qualifying assets.
1. Calculation of Weighted Average Borrowing Cost:
The bank loan of R1,000,000 at a rate of 15% per annum was obtained on 1st January 2019 and was outstanding for the entire year. Therefore, the borrowing cost for this loan is calculated as follows:
R1,000,000 * 15% = R150,000
The 18% 5-year loan of R1,500,000 was outstanding for the entire year. Therefore, the borrowing cost for this loan is calculated as follows:
R1,500,000 * 18% = R270,000
The 14% debentures of R1,000,000 were outstanding for the entire year. Therefore, the borrowing cost for this debenture is calculated as follows:
R1,000,000 * 14% = R140,000
Total borrowing costs = R150,000 + R270,000 + R140,000 = R560,000
2. Calculation of Average Borrowing Cost:
The average borrowing cost is calculated by dividing the total borrowing costs by the average amount of qualifying assets.
The qualifying assets for the entire year consist of the Power Plant construction and the investment of R400,000 for 2 months (January and February) at an interest rate of 9% per annum.
The average amount of qualifying assets is calculated as follows:
Power Plant Construction:
- Expenditure on 31st March 2019: R600,000
- Expenditure on 30th June 2019: R800,000
- Expenditure on 31st December 2019: R300,000
Total: R600,000 + R800,000 + R300,000 = R1,700,000
Investment of R400,000 for 2 months (January and February) at 9% per annum:
R400,000 * (9%/12) * 2 = R60,000
Total average amount of qualifying assets = R1,700,000 + R60,000 = R1,760,000
Average borrowing cost = Total borrowing costs / Total average amount of qualifying assets
Average borrowing cost = R560,000 / R1,760,000 = 0.3182 or 31.82%
3. Calculation of Borrowing Costs to be Capitalized and Expensed:
The borrowing costs to be capitalized are calculated by multiplying the average borrowing cost by the average amount of qualifying assets.
Borrowing costs to be capitalized = Average borrowing cost * Total average amount of qualifying assets
Borrowing costs to be capitalized = 31.82% * R1,760,000 = R558,032
The remaining borrowing costs are expensed:
Remaining borrowing costs = Total borrowing costs - Borrowing costs to be capitalized
Remaining borrowing costs = R560,000 - R558,032 = R1,968
Therefore, R558,032 will be capitalized and R1,968 will be expensed.
Benson Limited is constructing a Power Plant which was completed on 31st December 2019. The company obtained a bank loan of R1,000,000 at a rate of 15% per annum to construct the Power Plant on 1st January 2019. As of 31st December 2019, Benson Limited also had the following loans outstanding:
I. 18% 5-year loan Note of R1,500,000
II. 14% Debentures of R1,000,000
Expenditures on the project were made as follows:
I. On the 31st March 2019, R600,000 was incurred;
II. R800,000 was incurred on 30th June 2019;
III. The final expenditure incurred was R300,000 on 31st December 2019.
During the year Benson Limited invested R400,000 of the bank loan for 2 months at an interest of 9% per annum.
Required: Determine the amount of borrowing costs to be capitalized and expensed.
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