THEORIES

1. Borrowing cost include which of the following?

I. Interest expense on borrowings calculated using the effective interest method
II. Finance charge with respect to finance lease
III. Exchange difference arising from foreign currency borrowing that is regarded as an
adjustment to the interest cost
a. I and II only
b. I and III only
c. II and III only
d. I, II and III only

2. Which of the following statements is true concerning capitalization of borrowing cost?

I. If the borrowing is directly attributable to a qualifying asset, the borrowing cost is
required to be capitalized as cost of the asset
II. If the borrowing is not directly attributable to a qualifying asset, the borrowing cost
shall be expensed as incurred
a. I only
b. II only
c. Both I and II
d. Neither I nor II

3. For purpose of capitalization of borrowing cost, which of the following is not a qualifying
asset?
a. Manufacturing plant
b. Power and generation facility
c. Investment property
d. Asset that is ready for the intended use or sale

4. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is
equal to
a. Actual borrowing cost incurred
b. Actual borrowing cost incurred up to completion of asset
c. Actual borrowing cost incurred up to completion of asset minus any investment income
from the temporary investment of the borrowing
d. Zero

5. If the qualifying asset is financed by the general borrowing, the capitalizable borrowing cost
is equal to
a. Actual borrowing cost incurred
b. Total expenditures on the asset multiplied by a capitalization rate
c. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
cost incurred, whichever is lower
 d. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
cost, whichever is higher

6. The recoverable amount of an asset is defined as:

I. The asset’s resale value
II. Its value to the firm as it is stored away in the warehouse
III. Its value to the firm for internal use
a. I only c. II and III only
b. I and III only d. I, II and III only

7. What is the correct treatment for all eligible borrowing costs under IAS 23?
a. Expensed
b. Capitalized (All eligible borrowing costs must be capitalized under IAS 23 – Borrowing
Costs)
c. Both a and b
d. None of these

8. Which of the following is not a “qualifying asset” under IAS 23 – Borrowing Costs?
a. Mass produced inventory ( Mass produced inventory is not a qualifying asset under IAS
23 – Borrowing Costs as it does not take a substantial amount of time to get ready for
its intended use or sale)
b. Manufacturing plants
c. Made to order inventory
d. Investment property

9. Which of the following is not considered a “borrowing cost” under IAS 23?
a. Interest expense calculated by the effective interest method under IAS 39
b. Finance charges in respect of finance leases recognized in accordance with IAS 17
Leases
c. Exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs
d. Principal repayments on a loan for property, plant and equipment (Principal repayments
are not a borrowing cost, they are a part repayment of the original loan)

10. When activities to prepare an asset for its sale or use are suspended, borrowing costs must be
a. Capitalized
b. Expensed (When activities to produce an asset are suspended or interrupted, the
capitalization of borrowing costs must be suspended for the period. Any borrowing costs
incurred during this time must be expensed. Once the activities recommence, the
capitalization of borrowing costs may recommence.)
c. Ignored
d. Charged to equity
11. Big Group is constructing an office building and is capitalizing borrowing costs in
accordance with IAS 23 – Borrowing Costs. The office is almost complete; the only
remaining work is to install furniture.
Is Big Group allowed to continue capitalizing the borrowing costs?
a. Yes
b. No (No. Substantially all the activities necessary to prepare the asset for its intended use
or sale are complete. If only minor modifications are outstanding, this indicates that
substantially all of the activities are complete. Therefore, the borrowing costs should no
longer be capitalized.

12. Which of the following is not a condition to commence capitalization of borrowing costs?
a. Expenditures are being incurred
b. Borrowing costs are being incurred
c. Repayment of borrowings has commenced (The repayment of borrowings does not have
to commence in order to capitalize borrowing costs)
d. Activities to produce the asset for its intended use or sale have commenced

13. Which of the following may not be considered a “qualifying asset”?

a. A power generation plant that normally takes two years to construct
b. An expensive private jet that can be purchased from a local vendor
c. A toll bridge that usually takes more than a year to build
d. A ship that normally takes one to two years to complete

14. Which of the following costs may not be eligible for capitalization as borrowing cost?
a. Interest on bonds issued to finance the construction of a qualifying asset
b. Amortization of discount or premium relating to borrowing that qualify for
capitalization
c. Imputed cost of equity
d. Exchange difference arising from foreign currency borrowing to the extent that it is
regarded as an adjustment to interest cost pertaining to a qualifying asset

15. Capitalization of borrowing cost

a. Shall be suspended only during temporary period of delay
b. May be suspended only during extended period of delay in which active development id
delayed
c. Shall never be suspended once capitalization commences
d. Shall be suspended only during extended period of delay in which active development id
delayed

16. Which of the following is a disclosure requirement in relation to borrowing cost?

I. Amount of borrowing cost capitalized during the period
II. Segregation of assets that are “qualifying assets” from other assets in the statement of
financial position or as a disclosure in the notes to financial statements
 III. Capitalization rate used to determine the amount of borrowing cost eligible for
capitalization
a. I, II and III
b. I and II only
c. I and III only
d. I only

17. An asset is being constructed for an entity’s own use. The asset has been financed with a
specific new borrowing. The interest cost incurred during the construction period as a result
of expenditures for the asset is
a. Interest expense in the construction period
b. A prepaid asset to be written off over the estimated useful life of the asset
c. A part of the historical cost of acquiring the asset to be allocated over the term of the
borrowing used to finance the construction of the asset

18. When computing the amount of interest cost to be capitalized, the concept of “avoidable
interest” refers to
a. The total interest cost actually incurred
b. A cost of capital
c. That portion of total interest cost which would not have been incurred if expenditures
for asset construction had not been made
d. That portion of average accumulated expenditures on which no interest cost was
incurred

19. Which of the following assets could be treated as qualifying asset for purpose of capitalizing
borrowing cost
a. Investment property
b. Investment in financial instrument
c. Inventory that is manufactured or produced in large quantity on a repetitive basis and
takes a substantial period of time to get ready for use or sale
d. Biological asset

20. Which of the following statements about capitalization of borrowing cost as part of the cost
of a qualifying asset is true?
a. If funds come from general borrowings, the amount to be capitalized is based on the
weighted average amount of expenditures
b. Capitalization always continues until the asset is brought into use
c. Capitalization always commences as soon as expenditure of the asset is incurred
d. Capitalization always commences as soon as interest on relevant borrowings is being
incurred

21. Which of the following is required for borrowing cost incurred that is directly attributable to
the construction of a qualifying asset?
 I. Recognize as an expense in the period incurred
II. Capitalize as part of the cost of the asset
a. I only
b. II only
c. Either I or II
d. Neither I nor II

22. An entity is commencing a new construction project which is to be financed by borrowing,

the key dates for the current year are as follows:

May 15 Loan interest relating to the projects starts to be incurred.

June 15 Technical site planning commences
June 30 Expenditures on the project start to be incurred
July 15 Construction work commence
a. May 15
b. June 15
c. June 30
d. July 15

23. I. Interest on Bank overdrafts, short term and long term borrowings are the only items
included in borrowing costs.
II. Renting out an upgraded office building that you have purchased is an example of an
investment property. This is an example of an asset that does not qualify.
a. False, False c. False, True
b. True, False d. True, True

24. I. The basis for treating Borrowing costs should be mixture of cash basis
II. Borrowings can only be capitalized when it is likely that they will generate future
economic benefits
a. False, False c. True, False
b. False, True d. True, True

25. I. Other borrowing costs, those which cannot be capitalized, should be recognized as an
expense and written off in the period of incurrence.
II. The general pool of funds used to complement borrowings for a qualifying asset may
relate just to the subsidiary. If this is the case, then use the weighted average cost relating just
to the borrowings of the subsidiary.
a. False, False c. True, False
b. False, True d. True, True
 PROBLEM SOLVING

For questions 1, 2, and 3 refer to the following:

Stone D. Limited borrowed a loan from bank at 12% per annum amounting to P 1, 000,000 for
the construction of power generation facilities of the company. The loan was received on January
01 and utilized P 300,000 on Qualifying Asset. On January 1, the company deposited the
remaining amount in a bank yielding interest at 6%. Whole of the amount is withdrawn and paid
to contractor on March 01. The company returned the loan to bank after 9 months i.e. on October
01.

1. How much is the Interest Income?

A. -7000 C. 10500
B. 7000 D. -10500

Solution: 700,000
x 6%
x 2/12
7,000

2. How much is the Borrowing Cost eligible for capitalization?

A. 90 000 C. 83 000
B. 79 500 D. 80 000

Solution: Interest paid to bank (1,000,000 x 12% x 9/12) 90,000

Less: Interest income( 700,000 x 6% x 2/12) (7,000)
Borrowing cost eligible for capitalization 83,000

3. What is the total Capital expenditure?

A. 1 083 000 C. 90 000
B. 927 000 D.911 000

Solution: Interest paid to bank 1,000,000 x 12% x 9/12 90,000

Less: Interest income 700,000 x 6% x 2/12 (7,000)
Borrowing cost eligible for capitalization 83,000
Borrowed loan 1,000,000
Capital expenditure (P 1,000,000 + 83,000) 1,083,000
For numbers 4 - 7, use the following:

CAD Inc. started the construction of an asset on 1 January 201X with a loan of $40,000
borrowed at an interest rate of 9% per annum. The loan was used on the asset as follows:

1 January 201X 15,000

1 May 201X 20,000

1 October 201X 5,000

The construction of the asset was completed on 31 December 201X. However, during the
accounting period CAD Inc. has invested the surplus funds at an interest rate of 3% on temporary
basis before these were required for spending.

4. How much is the total Income from temporary investment of funds?

A. 250.6 C. 500
B. 312.50 D. 562.50

Solution: (25,000 * 3%) * 4/12 + (5,000 * 3%) * 5/12 = $312.5

5. What is the Actual Borrowing cost?

A. 2325 C. 3600
B. 312.50 D. 1500

Solution: $40,000 * 9% = 3600

6. How much is the Eligible Borrowing Cots?

A. 1200 C. 312.50
B. 3600 D. 3287.50

Solution: ($40,000 * 9%) – $312.5 = $3,287.5

7. How much is the Cost of Asset at December 31, 201X?

A. 43287.50 C. 40312.50
B. 43600 D. 42325

Solution: ($15,000+$20,000+$5,000) + $3,287.5 = $43,287.5

Use the following for questions 8-11

Manok N. Pla. started the construction of an asset on 1 January 2019. For this purpose three
loans were outstanding at the start of the year as follows:

Interest Rate, %
Amount, $’000

Loan 1 80,000 11

Loan 2 70,000 15

Loan 3 40,000 17

The funds were used on the asset as follows:

$’000

1 January 2019 25,000

1 May 2019 20,000

1 October 2019 15,000

The construction of the asset was completed on 31 December 2019.

8. What is the Average amount invested into the Asset?

A. 55486 C. 42083
B. 20000 D. 57360

Solution: $25,000 + $13,333 + 3750 = $42,083

9. What is the Weighted Average Cost Rate?

A. 13.13% C. 14%
B. 13.57% D. 13.74%

Solution: ($80,000 / $190,000) * 11% + ($70,000 / $190,000) * 15% + ($40,000

/ $190,000) * 17% = 13.74%

10. How much is the Eligible Borrowing cost?

A. 5663 C. 5750
B. 5009 D. 5782

Solution: $42,083 * 13.74% = $5,782

11. How much is the Cost of Asset by December 31, 2019?
A. 60749 C. 64556
B. 65782 D. 63994.50

Solution: (25,000+$20,000+$15,000) + 5,782 = $65,782

For problems 12-16:

MIMI - YUH raised a $20 million loan having interest rate of 7.5% on 1 January 2020.The loan
was specifically raised for the construction of an office building which meets the definition of a
qualifying asset under IAS 23. The construction of the office building started on 1 February 2020
and the construction was completed on 30 November 2020. However, the construction of the
office building was suspended for two months period because of the shortage of material and
labor strikes during July and August 2020. The loan was temporarily invested for the month of
January 2020 and earned interest of $80,000.

12. How much is the Borrowing cost to be charged to profit or loss?

A. 505000 C. 500000
B. 1500000 D. 450000

Solution: $1,500,000 x 4/12 = $500,000

13. What is the Actual borrowing cost?

A. 1125000 C. 875000
B. 1000000 D. 1500000

Solution: $1,500,000 x 8/12 = $1,000,000

14. What is the Income from temporary investments?

A. 0 C. 1500000
B. 500000 D. 1000000

Solution: 0

15. How much is the borrowing cost to be capitalized?

A. 1080000 C. 1000000
B. 920000 D. 80000

Solution: ($1,500,000 x 8/12) – 0 = $1,000,000

16. What is the cost of asset in the Statement of Financial Position?
A. 2000000 C. 1000000
B. 3000000 D. 1420000

Solution: $2,000,000 + $1,000,000 = $3,000,000

For problems 17

Mamamoo Company has the following loans outstanding as at December 31, 2005.

Loan 1 6% (Due since opening date) 300,000

Loan 2 8% (Taken on 1 April, 2005) 200,000
Loan 3 9% (Taken on 1 July, 2005) 150,000

The company spent following amounts on construction of an asset.

January 31, 2005 70,000

April 1, 2005 80,000
December 1, 2005 10,000

17. How much is the Total Interest?

A. 18750 C. 36750
B. 6750 D. 24750

Solution: 18,000 + 12,000 + 6,750 = 36,750

18. What is the Weighted Average Loan?

A. 375000 C. 452000
B. 525,000 D. 550000

Solution: 300,000 + 150,000 + 75,000 = 525,000

19. What is the Capitalization Rate?

A. 8% C. 11%
B. 4% D. 7%

Solution: 36,750/525,000 * 100 = 7%

20. How much is Borrowing Cost chargeable as expense?
A. 28000 C. 29000
B. 26500 D. 27250

Solution: Total borrowing cost 36,750

Borrowing cost eligible for capitalization (8,750)
Borrowing cost chargeable as expense 28,000

21. Total Capital Expenditure?

A. 168500 C. 166250
B. 160000 D. 168750

Solution: Incurred cost 160,000

Borrowing cost eligible for capitalization 8,750
Total 168,750

For problems 22-25 use the following:

BIB Infrastructures, Inc. (BIBI) is a company set up to build, own and operate all key public
infrastructure projects in BIB. On 1 January 2019, it contracted Mahandra Inc. (MI) to build a
bridge over Indus at a total cost of $8,000,000. Following is the schedule of payments made by
BIBI to MI over the year:

Payment Date Expenditure

01-Jan-19 3,000,000
01-May-19 1,000,000
01-Sep-19 2,000,000
01-Dec-19 2,000,000

Half of the project cost is financed by a specific loan carrying annual interest rate of 8% and the
rest is financed out of two general loans: a loan from MCB of $10,000,000 carrying 10% annual
interest rate and another loan from UBL of $5,000,000 carrying 11% annual interest rate. MI
ceases work on the project in the monsoon season i.e. July and August.

22. What is the weighted average expenditures?

A. 4300000 C. 3833333
B. 4333333 D. 4500000

Solution: 01-Jan-19 3,000,000 12 months 1.00 3,000,000

01-May-19 1,000,000 8 months 0.67 666,667
01-Sep-19 2,000,000 4 months 0.33 666,667
01-Dec-19 2,000,000 1 month 0.08 166,667
4,500,000
23. How much is the total interest?
A. 1550000 C. 1000000
B. 1500000 D. 1525000

Solution: MCB 10,000,000 10% 1,000,000

UBL 5,000,000 11% 550,000
15,000,000 1,550,000

24. What is the Weighted Average Interest Rate?

A. 9.45% C. 10.33%
B. 11.67% D. 7.77%

Solution: $1,550,000 = 10.33%

$15,000,0000

25. How much is the Capitalized Interest?

A. 371000 C. 351667
B. 371667 D. 320000

Solution: Specific Loan 4,000,000 8% 320,000

General pool 500,000 10.33% 51,667
371,667