Goodfood is a supermarket chain. During the current year it started building a new store. The directors are aware that in accordance with IAS23 Borrowing costs certain borrowing costs have to be capitalised.

Details relating to the construction of Goodfoods new store:

Goodfood took out a 10 million loan with an interest rate of 7.5% per annum on 1 April 2017. The loan was specifically taken to finance the building of the new store which meets the definition of a qualifying asset in IAS23. Construction of the store started on 1 May 2017 and it was completed and ready for use on 28 February 2018.

Question:

Rather than take out a loan specifically for the new store Goodfood could have funded the store from existing borrowings which are:

• 10% bank loan of 50 million
• 8% bank loan of 30 million

In this case it would have applied a capitalisation rate to the expenditure on the asset. What would that rate have been?

9.25%

10%

8.75%

9%