Question

Ricardo Limited is constructing a Power Plant which was completed on 31st December 2023. 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 2023. As of 31st December 2023, Ricardo Limited also had the following loans outstanding:


18% 5-year loan Note of R1,500,000
14% Debentures of R1,000,000
Expenditures on the project were made as follows:

On the 31st March 2023, R600,000 was incurred;
R800,000 was incurred on 30th June 2023;
The final expenditure incurred was R300,000 on 31st December 2023.
During the year Ricardo Limited invested R400,000 of the bank loan for 2 months at an interest of 9% per annum.

Required:

· Define Borrowing costs and the accounting standard

· When do you capitalise costs and when are they expenses?

· Determine the amount of borrowing costs to be capitalized and expensed.