Question

Gidi Professional Institute is constructing a Tuition Center at Aboabo that will take about 18 months to complete. The company commenced construction on 2 January 2018.

        The following payments were made during the year:                              GH¢‘000

        31 January                                                                                                40,000

        31 March                                                                                                  90,000

30. June      20,000
31. October            40,000

        30 November                                                                                            50,000

The first payment on 31 January was funded from the company’s pool of debts. However, the company succeeded in raising Medium-Term Loan Notes for an amount of GH¢160,000,000 on 31 March 2018 at a simple interest rate of 9 percent per year, calculated and payable monthly in arrears.

These funds were specifically used for the construction. Excess funds were temporarily invested at 6 percent monthly in arrears and payable in cash. The pool of debts was again used for a GH¢40,000,000 payment on 30 November 2018 which could not be funded from the Medium-Term Loan Notes. The construction project was temporarily halted for three weeks in May 2018 when substantial technical and administrative work was carried out.

The following amounts of debts were outstanding at the reporting date of 31 December 2018:

	GH¢’000
Medium-Term Loan Notes	160,000
Bank Overdraft	240,000

        10% 7-year Notes 1/10/2018 with simple interest payable annually at 31 Dec         1,800,000

For the bank overdraft, the weighted average amount outstanding during the year was GH¢150,000,000 and the total interest charged by the bank amounted to GH¢6,760,000 for the year.

Required

        Calculate the total amount of interest to be capitalised                                                  

Answer 1

Total amount of interest to be capitalised
Specific Loan : 160,000,000 x 9% x 9/12	10,800,000.00
Interest earned on unused portion of loan available during the year
April 1 to June 30 (160,000,000 - 90,000,000) x 6%x 3/12	(1,050,000.00)
July 1 to Oct 30 (160,000,000 - (90,000,000+20,000,000) x 6% x 4/12	(1,000,000.00)
Nov 1 to Nov 30 (160,000,000 - (90,000,000+20,000,000+40,000,000) x 6% x 1/12	(50,000.00)
		8,700,000.00
General pool of Funds
)Paid on Jan 31 (40,000,000 x 11/12 x 4.57%	1,676,328.50
Paid on Nov  30 (40,000,000 x 1/12 x 4.57%)	152,393.50	1,828,722.00
Total amount to be capitalized		10,528,722.00
Capitalized Rate = (6,760,000 + (1,800,000 x 10%))/(1,800,000+150,000,000)	4.57%