BORROWING COST

PROBLEM SOLVING
MODULE 10

Specific Borrowing
1. On January 1, 20x1, ALSU Co. borrowed The following represents the borrowings of
P20M to finance the construction of a new DLSU Co. as of December 31, 20x1:
building. Interest is payable on the loan at a. 10%, P28M, 4-year note dated January
8%. Stage payments wre dure throughout the 1, 20x1 with simple interest payable
construction period and therefore excess annually, specifically borrowed to finance
funds were invested during that period. By the construction project. Interest income
the end of the project on December 31, 20x1, earned on the temporary investment of
investment income of P600,000 had been the proceeds is P480,000
earned. How much is the capitalized b. 12.5%, P40M, 10-year note dated
borrowing cost? January 1, 20x1 with interest payable
annually
General Borrowing c. 10%, P60M, 10-year note dated
2. On January 1, 20x1, BLSU Co. had the December 31, 19x9 with interest payable
following borrowings made for general annually
purposes and a part of the proceeds was
used to finance the construction of a How much is the capitalizable borrowing
qualifying asset: cost?

Principal Limit on average expenditures

12% short-term note 40,000,000 5. FLSU Co. started construction of a qualifying
14% bank loan (3-year) 72,000,000 asset for GLSU Co. on January 1 20x1. The
16% note payable (5-year) 88,000,000 following were expenditures incurred on the
construction.
The construction of the qualifying asset was
started on immediately and expenditures Date Expenditures
incurred on the qualifying asset were as January 1, 20x1 4,000,000
follows: May 1, 20x1 1,800,000
December 1, 20x1 2,880,000
Jan 1 19,200,000
March 31 8,800,000 a. Included in the January 1, 20x1,
July 30 14,000,000 expenditures is cost of materials
October 1 21,600,000 purchased on account for P400,000. The
December 31 1,200,000 account was settled on July 1, 20x1.
b. Included in May 1, 20x1, expenditures is
How much is the capitalizable borrowing P40,000 cost of materials obtained in
cost? exchange for old equipment.

Progress billings during the year are as follows:

General Borrowing (expenditures incurred
Date of Amount Date billings
evenly)
Billing Billed were collected
3. On January 1, 20x1, CLSU Co. had the
following borrowings made for general April 1, 20x1 800,000 June 1, 20x1
purposes and a part of the proceeds was September 1, 2,400,000 November 1,
used to finance the construction of a 20x1 20x1
qualifying asset:
a. Payments on billings are subject to 10%
Principal withholding by GLSU Co.
b. FLSU Co. determined the capitalization
12% short-term note 40,000,000
rate to be 10%
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000
How much is the capitalizable borrowing cost?
The construction started on January 1 and
Extended period of construction
was completed on December 20x1. The total
HLSU Co. started construction of a qualifying
cost of construction was P72M which was
asset for ILSU Co. on January 1, 20x1. The
incurred evenly during the year. How much is
following were expenditures incurred on
the capitalizable borrowing cost?
construction.
Specific and General Borrowing
20x1 Expenditures
4. On January 1, 20x1, DLSU Co. contracted for
January 1, 20x1 4,000,000
the construction of a building for P80M on a
land that it had previously purchased. The May 1, 20x1 1,800,000
building was completed on December 20x1. December 1, 20x1 2,880,000
The following payments were made to the
contractor: 20x2 Expenditures
January 1, 20x2 3,600,000
Payment Date Amount August 31, 20x2 1,200,000
January 1, 20x1 8,000,000 20x3 Expenditures
March 31, 20x1 24,000,000 July 1, 20x3 2,400,000
September 30, 20x1 40,000,000
December 31, 20x1 8,000,000
“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA 1

 BORROWING COST
PROBLEM SOLVING
MODULE 10

HLSU Co. determined the capitalization rate to be

10%. The construction of the qualifying asset was
substantially completed on September 30, 20x3.

6. How much is the capitalizable borrowing cost

in 20x1?
7. How much is the capitalizable borrowing cost
in 20x2?
8. How much is the capitalizable borrowing cost
in 20x3?
9. How much is the total cost of the constructed
qualifying asset on September 30, 20x3?

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA 2