The following information for Calvin Ltd is available:
Borrowing costs
Period
1
2
3
Total
Month
4
4
4
4
Average bank overdraft
R1 800 000 @ 26%
R156 000
-
-
R156 000
R1 2000 000 @ 18%
-
R72 000
R72 000
R144 000
Loans incurred
R800 000 @ 24%
R64 000
R64 000
-
R128 000
R1 2000 000 @ 16%
-
-
R64 000
R64 000
R220 000
136 000
R136 000
R492 000
Asset under construction
Period
1
2
3
Total
Month
4
4
4
12
Expenses incurred during the period (evenly)
R100 000
R400 000
R1 400 000
R1 900 000
ASSUMPTIONS
1. Interest is paid at the end of each period from the available loan capital.
2. When there are changes in the loans, the loans are either incurred at the beginning of a period redeemed at the end of a period.
REQUIRED:
Assume that the overdraft facility was used to finance the construction of the asset. Any shortages will be financed by means of the pool of loans. Calculate the amount of borrowing costs to be capitalised according to the requirements of statements of generally accepted accounting practice. Do all calculations to the nearest rand.
NB: Show all workings for the term
To calculate the amount of borrowing costs to be capitalized, we need to determine the weighted average borrowing costs.
Step 1: Calculate the weighted average borrowing costs for the bank overdraft:
Interest on bank overdraft = R1,800,000 * 26% + R1,200,000 * 18% = R468,000 + R216,000 = R684,000
Weighted average borrowing costs for the bank overdraft = Interest on bank overdraft / Total average bank overdraft = R684,000 / R1,560,000 = 43.85%
Step 2: Calculate the weighted average borrowing costs for the loans:
Interest on loans = R800,000 * 24% + R1,200,000 * 16% = R192,000 + R192,000 = R384,000
Weighted average borrowing costs for the loans = Interest on loans / Total loans incurred = R384,000 / R2,000,000 = 19.2%
Step 3: Calculate the total borrowing costs to be capitalized:
Borrowing costs to be capitalized = Expenses incurred during the period * Weighted average borrowing costs
= (R100,000 + R400,000 + R1,400,000) * 43.85% + R1,900,000 * 19.2%
= R1,900,000 * 43.85% + R1,900,000 * 19.2%
= R832,150 + R364,800
= R1,196,950
Therefore, the amount of borrowing costs to be capitalized according to the requirements of statements of generally accepted accounting practice is R1,196,950.