Question 1

Jalopy Inc. is constructing a warehouse that will take 18 months to complete. It began

construction on January 1, 2002. The following payments were made during 2002:

$

January 31 200 000

March 31 450 000

June 30 100 000

October 31 200 000

November 30 250 000

The first payment on January 31 was funded from the enterprises pool of debt. However,

the enterprise succeeded in raising a medium-term loan for an amount of $800 000 at

March 31, 2002 with simple interest of 9% per annum, calculated and payable monthly in

arrears. These funds were specifically used for this construction. Excess funds were

temporarily invested at 6% per annum monthly in arrears and payable in cash. The pool

of debt was again used to an amount of $200 000 for the payment on November 30 which

could not be funded from the medium-term loan.

The construction project was temporarily halted for 3 weeks in May due to substantial

technical and administrative work being carried out. It is assumed that management of Jalopy Inc. adopted the accounting policy of capitalizing borrowing costs.

The following amounts of debt were outstanding at the balance sheet date, 31 December

2002:

$

i. Medium-term loan (see above) 800 000

ii. Bank overdraft (weighted average amount outstanding during the year 1 200 500

(was $750 000 and total interest charged by the bank amounted to $33 800 for the year)

iii. A 10%, 7-year note 9 000 000

(dated October 1, 1997 with simple interest payable annually at Dec 31)

Required:

a. Calculate the amount to be capitalized to the cost price of the warehouse in 2002.

(16 marks)

b. What are the disclosure requirements for borrowing costs based on IAS 23

(3 marks)

(Total 25 marks)