King Konstruction Ltd will construct an oil rig during its current financial year ended 30 June 2023. To construct the oil rig, King Konstruction Ltd will need more loans in addition to the existing finance facilities already obtained by the entity. The construction began on 1 July 2022 and was completed on 30 June 2023. The Financial Manager at King Konstruction Ltd requires your assistance to determine the amount of borrowing costs that can be capitalized to the cost of the oil rig plant.

Details regarding certain payments relating to the construction of the oil rig:

Description

Payment to a contractor Payment to a supplier Payment to a contractor Total

Date of payment 1 July 2022

1 January 2023 1 March 2023

Amount of payment R4 000 000

R3 000 000

R5 000 000

R12 000 000

A specific loan for the R12 000 000 was negotiated with Green Bank and obtained on 1 July 2022 at a rate of 8.5% per annum. Any surplus funds regarding the specific loan were reinvested at another bank, Blue Bank at 7.2% per annum.

King Konstruction Ltd also had general borrowings as follows:

Loan with R8 000 000 R9 000 000 R8 500 000 Yellow Bank

Overdraft at R2 500 000 R5 000 000 R3 750 000 Red Bank

R420 000 R450 000

Name of financial institution.

General borrowings outstanding on 1 July 2022.

General borrowings outstanding on 23 June 2023.

Average general borrowings outstanding for the 2023 financial year.

Interest incurred

During March 2023, heavy winter rains resulted in the construction being halted for the entire month.

REQUIRED:

Assist the Financial Manager of King Konstruction Ltd to calculate the amount of net borrowing costs that should be capitalised in terms of IAS 23 to the cost of the oil rig plant where costs relating to the construction were paid for using the following:

4.1 Only the specific loan (14 marks)

4.2 Only the existing general loans (14 marks)

Ignore all taxation.

Round of rates and monetary amounts to two decimal places.

Competency Framework Reference:

D1.1

Financial reporting: in accordance with Internati