Borrowing Cost

1. If the qualifying asset is financed by general borrowing, the capitalizable borrowing cost is equal
to
a. Actual borrowing cost incurred
b. Total expenditures on the asset multiplied by 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 incurred whichever is higher
2. Which of the following costs may not be eligible for capitalization of borrowing cost?
a. Interest on Bonds issued to finance the construction of a qualifying asset.
b. Amortization of discount or premium relating to borrowings 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
3. Borrowing costs are interest and other cost that an entity incurs in connection with the
borrowing of funds. Borrowing cost does not include
a. Interest expense calculated using the effective interest method
b. Finance charges in respect of finance leases recognized in accordance with PAS 17`
c. Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs
d. Actual or imputed cost of equity, including preferred capital not classified as liability
4. Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset shall be recognized as
a. *Part of the cost of the asset
b. **Expenses in the period incurred
c. Either * or **
d. Neither * or **
5. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale. This may include
a. Financial assets
b. Inventories that are manufacertured, or otherwise produced over a short period of time
c. Assets that are ready for their intended or sale when acquired
d. Intangible assets
6. The borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset are
a. Those borrowing costs that would have been avoided if the expenditure on the qualifying
asset had not been made.
b. *Those borrowing costs incurred during the period less any investment income on the
temporary investment of the borrowings.
c. **Those borrowing costs computed by applying a capitalization rate to the expenditure on
that asset.
d. The lower of * and **.
7. Capitalization of borrowing costs should cease
 a. When expenditures are being incurred, borrowing costs are being incurred and activities
that are necessary to prepare the asset for its intended use or sale are in progress
b. When substantially all of the activities necessary to prepare the asset for its intended use or
sale are complete
c. During the periods in which active development is interrupted
d. When the asset is brought into use.
8. The commencement date for capitalization of borrowing costs is the date when the entity first
meets which of the following conditions
i. It incurs expenditures for the asset
ii. It incurs borrowing costs
iii. It undertakes activities that are necessary to prepare the asset for its intended use
A. I,ii,iii
B. I, ii
C. I,iii
D. Ii
9. On January 1, 2018, the Divine Company took out a 12% P10 million loan to finance the
construction of a building. The key dates are as follows:
January 1 – Loan interest relating to the project starts to be incurred
February 1 – Technical site planning commences
March 1 – Expenditures on the project start to be incurred
April 1– Construction Work Commences
November 1 – Substantially all of the activities necessary to prepare the asset for its intended
use are complete
December 1 – Building brought into use

What amount of interest should divine capitalize for the current year?

a. 1,000,000
b. 900,000
c. 800,000
d. 700,000
10. On January 1, 2018, Imp Company borrowed P6 million at an annual interest rate of 10% to
finance the costs of building an electricity generating plant. Construction commenced on
January 1, 2018 and cost P6 million. Not all the cash borrowed was used immediately, so
interest income of P80,000 was generated by temporarily investing some of the borrowed funds
prior to use. The project was completed on November 30, 2018. What is the carrying amount of
the plant at November 30, 2018?
a. 6,000,000
b. 6,470,000
c. 6,520,000
d. 6,420,000
11. Aries Company started construction on a building on January 1 of this year and completed
construction on December 31 of the same year. Aries had only two interest notes outstanding
during the year and both of these notes were outstanding for all 12 months of the year. The
following information is available:
 Average accumulated expenditures 250,000
Ending balance in construction in progress before capitalization of interest 360,000
6 percent note incurred specifically for the project 150,000
9 percent long term note 500,000
What amount of interest should Aries capitalize for the current year?
a. 27,900
b. 22,500
c. 18,000
d. 15,000
12. Idle Department Store construct its own stores
Additional information follows:
Total construction expenditures:
January 2, 2017 600,000
May 1, 2017 600,000
November 1, 2017 500,000
March 1, 2018 700,000
September 1, 2018 400,000
December 31, 2018 500,000
3,300,000

Outstanding company debt:

Mortgage related directly to new store; interest rate, 12%; term,
5 years from beginning of construction 1,000,000

General Liability:
Bonds issued just prior to construction of store; interest rate 10% for 10 years 500,000
Bonds issued just prior to construction; interest rate, 8%; mature in 5 years 1,000,000
Estimated cost of equity capital 14%

The capitalizable borrowing cost for 2017 using the traditional method is
a. 138,850
b. 127,250
c. 122,850
d. 250,000

13. The capitalizable borrowing cost for 2017 using the avoidable interest method is
a. 138,850
b. 127,250
c. 122,850
d. 250,000

14. The capitalizable borrowing cost for 2018 using the traditional method is
a. 255,330
b. 254,321
 c. 253,938
d. 250,000

Maragondon Company had the following borrowings during 2018. The borrowings were made for
general purposes but the proceeds were used in part to finance the construction of a new building:

Principal Interest
12% bank loan 10,000,000 1,200,000
15% long-term loan 20,000,000 3,000,000
30,000,000 4,200,000

The construction began on January 1, 2018 and was completed on December 31, 2018. Expenditures on
the building were made as follows:
January 1 8,000,000
June 30 8,000,000
December 31 4,000,000

The capitalizable borrowing cost is

a. 1,680,000
b. 1,400,000
c. 4,200,000
d. 1,620,000