Problem 2 – Commencement, suspension, cessation of capitalization, specific and general borrowings

On January 1, 20A1, Vanilla Corporation borrowed P5,000,000 at an interest rate of 10% specifically for
the construction of its new building payable at the end of 5 years. The interest on the loan is payable at
the end of each year. Vanilla incurred the following costs in connection with the loan (assume incurred
on January 1, 20A1):

Commissions paid to its agent P200,000

Guarantee fees paid to its parent company,
Espresso Mocca, Inc. for the loan guarantee 1.5% of the loan amount
Bank charges 1.0% of the loan amount
Effective interest rate (interpolated) 11.8%

On the same date, Vanilla temporarily invested P3,000,000 of the proceeds for three months earning
interest of 8% per annum. Vanilla had also the following other loans during the year for general
purposes:

Principal

11% Short-term Note P1,000,000

13% Long-term Loan 600,000

The proceeds of these loans were partly used for the construction of the building. The interests on these
loans are payable every December 31 as well.

As early as January 1, 20A1, the entity already started the activities associated with obtaining permits
prior to commencement of physical construction. The physical construction of the building began only
on April 1, 20A1. Expenditures on the building were made as follows:

Principal

January 1, 20A1 1,500,000

April 1, 20A1 3,500,000

July 1, 20A1 3,200,000

October 1, 20A1 2,300,000

December 31, 20A1 1,000,000

In October, the construction had to be stopped for a month because of incessant rain that caused
flooding in the construction site. Such temporary delay is common during the construction period in the
geographical region where the building is being constructed.

The physical construction of the building was completed by the end of 20A1. However, routine
administrative work is still expected to continue up to the first quarter of the following year.

Required:
1. Compute the capitalization rate used to determine the amount of borrowing cost eligible for
capitalization.

Problem 3 – Specific and general borrowings, longer construction period

On January 1, 20A1, Builder Company decided to construct a building. The following are the list of
expenditures incurred for the year 20A1:

1/1/20A1 300,000

6/1/20A1 400,000

8/30/20A1 650,000

12/1/20A1 300,000

3/31/20A2 400,000

8/1/20A2 420,000

On March 1, 20A1, Builder Company obtained a P600,000, two-year construction loan bearing a 9%
interest. Interest is payable every March 1.

Builder Company had two long-term interest bearing loans outstanding as of the beginning of the year
as follows: 12%-P200,000 and 15%-P2,300,000. The interests on these loans are payable every
December 31. All debts (including the specific borrowing) were outstanding during 20A1 and 20A2. The
company’s year-end is December 31. It uses the straight line method for depreciating similar building.
The building was completed on August 31, 20A2 and is expected to have a useful life of 10 years.

Required:

1. Compute the capitalization rate used to determine the amount of borrowing cost eligible for
capitalization.

2. Calculate the amount of capitalized borrowing costs and borrowing cost expensed in 20A1 and 20A2.