Question #3

Beta Engineering Ltd has a Plant under construction that is being financed with $10 million of debt, 8 million of which is a construction loan specifically for the construction of the plant. The rest of the construction is financed out of the general pool of debt of the company; $1.5 M on June 1, 2020, and $500,000 on October 1, 2020. The company will use the plant to manufacture a line of new products.

Construction of the plant did not begin until February 1, 2020. Also, construction was halted for the months of July and August due to inclement weather conditions.

Interest income of $40,000 was earned from the temporary investment of portions of the construction loan.

The debt structure of the firm is as follows: Construction loan @ 12 %

Long term debenture @ 7 %

10 year 10% Note

$8 000 000 (Acquired on January 1, 2020) $12 000 000

$5 000 000

The debentures and the 10-year 10% note were issued at the same time.

Assume the financial year ends on December 31

Required:

i. Compute the amount of interest payable during the year

ii. Determine the amount of interest cost to be capitalized to the plant under construction.

(6 marks)

iii. What amount of interest should be reported on the statement of comprehensive income? (2