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Cost of Land
Land 400,000
Demolition cost 30,000
Less: Salvage (6,500)
Cost of Land 423,500
Cost of Building
Architect Fee 20,000
Mobilization Advance 30,000
First Payment 100,000
Second Payment 110,000
Final Payment 150,000
Borrowing cost (working 1) 12,575
Cost of Building 422,575
Working 1
Interest on specific loan (200,000 x 6% x 14/12) 14,000
Less: reinvestment Income
(200,000 - 50,000) reinvested from 1.3.17 till 30.6.17 at 4% (2,000)
(200,000 - 50,000 - 100,000) from 1.7.17 till 31.12.17 at 4% (1,000)
11,000
Add: Interest on 60,000 from 1.1.18 till 30.6.18 at 5.25% 1,575
12,575
Weighted average rate = (6% x 100/400) + (5% x 300/400) = 5.250%
Loan Balance
Payments for Building: 200,000
Architect Fee + Mobilization Advance (1.3.17) 50,000 150,000
First Payment to contractor (1.7.17) 100,000 50,000
Second payment to contractor (1.1.18) 110,000 (60,000)
(60,000 to be utilized from general loan till 30.6.2018)
Note:
Capitalization will start when all three conditions i.e. expense incurred, activities started, and
loan obtained have incurred. The loan is obtained on 1.1.17, but activities start from 1.3.17.
Therefore, capitalization of borrowing cost will start from 1.3.17 (total of 14 months till 30.6.18)
Question 2
A Cost of waste-treatment plant
Mobilization Advance (1.1.17) 25,000
First Bill raised (30.6.17) 50,000
Second Bill raised (31.12.17) 75,000
Final Bill raised (on completion 31.8.2018) 50,000
Borrowing Cost 7,650
Cost of the waste-treatment plant 207,650
Weighted Average Rate for capitalization
(6% x 100/250) + (8% x 150/250) = 7.200%
B Journal Entries
On 1.1.19 (recognition of waste-treatment plant)
Plant 207,650
Work-in-progress 207,650
Liabilities
Deferred Grant Revenue 47,500
Income Statement
For the year ending 31 December 2019
Admin Expenses
Depreciation Expense 10,383
Other Income
Grant Revenue 2,500