Aftab Company limitedrealized itself as a social responsible company and decided

Question

Aftab Company limitedrealized itself as a social responsible company and decidedto

construct an employeeshousing society for its employees working in the company,which

was destroyed by anearth quake few years ago in the region. It was estimatedby

construction expertsthat this project would take three years to complete andcapital

needed for theconstruction would not be less then Rs. 3 million. For the purposeof

safety, the Aftablimited borrowed Rs. 3.4 million from different sources and usedthe

extra 0.4 million forthe purpose of working capital needs.

Aftab Company Limitedborrowed the loans as the followings:

Loan from AmericanBank: Rs. 1 million at 7% per annum

Loan from MCB: Rs. 1.5million at 6% per annum

Loan from Mezaan Bank:0.9 million at 8% per annum

At the initial stageof the project, there were idle funds of Rs. 1 million which theAftab

Limited invested for aperiod of nine months. The income from this investment wasRs.

60,000.

If the Aftab limitedadopted Allowed alternative treatment then:

1. How the AftabCompany Limited would it treat the borrowing costs.

2. How would itcapitalize the borrowing cost?

3. What would be the treatment ofthe investment income?

Explanation / Answer

1

2

1

2

to get

3.Avoidable Interest

4.Capitalize , lesser of

Avoidable and Actual Interest

3

1

Borrowing cost is used to compute theActual Interest.

2

Capitalize the lesser of: 1.actual interest costs 2.avoidable interest Avoidable interest is the amount that couldhave been avoided if expenditures for the asset had notbeen made Computing Avoidable Interest: STEPS:

1

2

Determine Appropriate Weighted- Average Multiply interest accumulated by rate expenditures

to get

3.Avoidable Interest

4.Capitalize , lesser of

Avoidable and Actual Interest

3

Show in a Separate head of " Other Income" inincome statement.

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