Question

The statement of financial position of a company at year ended 31st December 2000 reflects the following status:
Amount (Rs.)
Plant under installation 2000,000
Other assets 8000,000
10,000,000
Loans
Bank Loan 18% 2,000,000
Bank Loan 20% 2,500,000
Bank Loan 22% 1,500,000
6,000,000
Shareholder’s Equity 4,000,000
             10,000,000

Bank loan of 20% was taken on April 1, 2000. Other loans were brought forward from 1999.
Expenditures incurred on plant under installation:
April 01, 2000 1,000,000
June 01, 2000 700,000
September 01, 2000 300,000
2,000,000

Required: Calculate borrowing cost and total capitalized cost of asset at 2000.

Answer 1

Finding the weighted Cost of the General Fund used for financing
Loan	Amt	Interst rate	Duration	Interest expense
Bank Loan 18%	2,000,000	18%	1 yr	360,000
Bank Loan 20%	2,500,000	20%	9 /12 yr	500,000
Bank Loan 22%	1,500,000	22%	1yr	330,000
Total	6,000,000			1,190,000
Weighted average interest rate =1190000/6000000=	19.83%
So borrowing cost =19.83%

	No let us find the Average investments in the payments :
	a.	b	c	d
Date	Amount paid from Loan for Asset	period loan used in year	Wtd Avg Interest rate	Interest to be capitalized=a*b*c
Apr 1,20	$                                                         1,000,000	9 /12 yr	19.83%	$    148,750.00
June 1,20	$                                                            700,000	7 /12 yr	19.83%	$      80,986.11
Sep 1,20	$                                                            300,000	4 /12 yr	19.83%	$      19,833.33
	Total			$    249,569.44

Let us find the Capitalized cost of Assets
Asset	Cost as on Dec31.
Plant under Installation	$   2,000,000.00
Add Interest to be capitalized	$      249,569.44
Total Capitalized Plant under installation	$   2,249,569.44
Other Assets	$   8,000,000.00
Total Assets	$ 10,249,569.44