Question
On 1 July 2006, entity A contracted for the construction of a building for $2m on land that it had previously purchased. The building was
On 1 July 2006, entity A contracted for the construction of a building for $2m on land that it had previously purchased. The building was completed at the end of June 2007, and during the period the following payments were made to the contractor:
Payment date Amount ($000)
1 July 2006 200
30 September 2006 600
31 March 2007 1,000
30 June 2007 200
Total 2,000
Entity As borrowings as at 30 June 2007 (year-end) were as follows:
a) 10% four-year note with simple interest payable annually, which relates specifically to the project; debt outstanding at 30 June 2007 amounted to $700,000. Interest of $65,000 was incurred on these borrowings during the year and interest income of $20,000 was earned on these funds while they were held in anticipation of payments;
b) 12.5% 10-year note with simple interest payable annually; debt outstanding at 1 July 2006 amounted to $1,000,000 and remained unchanged during the year; and
c) 10% 10-year note with simple interest payable annually; debt outstanding at 1 July 2006 amounted to $1,500,000 and remained unchanged during the year.
What amount of the borrowing costs may be capitalized at year end if entity A applies the policy in IAS 23, Borrowing Costs, to capitalize borrowing costs?
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