ACCA FR · Chapter 2 · Question 5 of 11
On 1 January 20X5 Heron Co took out a $6,000,000 loan at 8% a year specifically to build a new warehouse. Construction began on 1 April 20X5 and was still in progress at 31 December 20X5. During the construction period Heron Co earned $40,000 by temporarily investing loan funds it had not yet spent. What borrowing cost should be capitalised for the year ended 31 December 20X5?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $320,000
Explanation
Under IAS 23, capitalisation begins when expenditure and borrowing costs are being incurred and construction activity has started, which is 1 April. Interest for April to December = $6,000,000 x 8% x 9/12 = $360,000. Investment income earned on the specific borrowing during that period is deducted: $360,000 - $40,000 = $320,000. Interest for January to March ($120,000) is expensed.
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