Multiple Choice -Theory (Borrowing Cost)

1.Borrowing cost can be capitalized as cost of the asset when

a.The asset is a qualifying asset.

b.The asset is a qualifying asset and it is not probable that the borrowing cost will result in future economic benefit to the entity.

c.The asset is a qualifying asset and it is probable that the borrowing cost will result in future economic benefit to the entity but the cost cannot be measured reliably.

d.The asset is a qualifying asset and it is probable that the borrowing cost will result in future economic benefit to the entity and the cost can be measured reliably.

2.If the qualifying asset is financed by specific borrowing, the capitalizable borrowingcost is equal to

a.Actual borrowing cost incurred

b.Actual borrowing cost incurred up to completion of asset

c.Actual borrowing cost incurred up to completion of asset minus any investment income from the temporary investment of the borrowing

d.Zero

2.Which of the following could be treated as qualifying asset for the purpose of capitalizing borrowing cost? a. Investment property

b.Financial asset at fair value

c.Inventory that is manufactured in large quantity on a repetitive basis and takes a substantial period of time to get ready for use or sale

d.Biological asset

3.If the qualifying asset is financed by general borrowing, the capitalizable borrowing cost is equal to

a.Actual borrowing cost incurred

b.Total expenditures on the asset multiplied by a capitalization rate

c.Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred, whichever is lower

d.Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred whichever is higher

4.The period of time during which interest must be capitalized ends when

a.The asset is substantially complet and ready for the intended use.

b.No further interest is being incurred.

c.The asset is abandoned, sold or fully depreciated.

d.The activities that are necessary to get the asset ready for the intended use have begun.

Multiple Choice -Computation (Borrowing Cost)

1.On January 1, 2020, Cagayan Company took out a loan of P24,000,000 in order to finance specifically the renovation of a building.The loan carried annual interest at 10%

The renovation work started on the same date.Work on the building was substantially complete on October 31, 2020.

The loan was repaid on December 31, 20202 and P200,000 investment income was earned n the period to October 31 on the proceeds of the loan not yet used for the renovation.

What amount of capitalizable borrowing cost should e included in the cost of the building?

a.2,400,000b.2,200,000c.2,000,000d. 1,800,000

2.During 2020 Joshua Company constructed asset costing P5,000,000.The weighted average expenditures totaled P3,000,000.

To help pay for construction, P2,200,000 was borrowed at 10% on January 1, 2020. Funds not needed for construction were temporarily invested in short-term securities yielding P45,000 in interest revenue.

Other than the construction funds borrowed, the only other debt outstanding during the year was a P2,500,000.10-year, 9% note payable dated January 1, 2019.

What amount of interest should be capitalized during 2020?

a.300,000b.150,000c.247,000d.472,000