During the year ended 31 December 2016, AB Ltd. started the construction of an a
ID: 2565264 • Letter: D
Question
During the year ended 31 December 2016, AB Ltd. started the construction of an asset, which will take three years to complete. For this purpose, a $850,000 specific loan carrying annual interest rate of 6% was borrowed on 1 February 2016. Furthermore, three general loans were outstanding at the start of the year as follows: Loan l Loan 2 Loan 3 Amount, S'000 10,000 8,000 5,000 Interest rate, % 1,000 720 430 The funds were used on the asset as follows: 1 March 2016 1 July 2016 1 December 2016 S'000 1,500 2,400 1800 The project is financed by the specific loan at first and the rest is financed by the three general loans. (a)Calculate the capitalization rate of general loans (b)Calculate the interest expense that AB Ltd. can capitalize as at year end 31 December 2016 and journalize the required entries.Explanation / Answer
(a) Capitalisation Rate of General loans: Annual Interest * 100
Amount of Loan Outstanding
Loan 1: 1000 * 100 = 10% , Loan 2: 720 * 100 = 9% , Loan 3: 430 * 100 = 8.6%
10000 8000 5000
(b) Interest expense that AB Ltd. can capitalise at year end 31st December 2016 = Interest on specific loans + Interest on three general loans
= 850000 * 6 * 11 = 46750 + 1000 + 720 + 430 = $48900
100 12
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