Pikton plc, a company with a 31st Dec year-end, had the following general borrowings in place...

Pikton plc, a company with a 31st Dec year-end, had the following general borrowings in place at the beginning and end of 20X6. 1 January 20X6 31 December 20X6 £m £m 10% Bank loan repayable 20X8 120 120 9.5% Bank loan repayable 20X9 80 80 On 1 March 20X6, Pikton plc began construction of a qualifying asset, a piece of machinery for a hydro-electric plant, using existing borrowings. Expenditure drawn down for the construction was £30million on 1 March 20X6 and £20million on 1 October 20X6.

(a) Calculate the weighted average borrowing rate (also known as the capitalisation rate)

(b) Calculate the amount of borrowing costs that can be capitalised for the hydro-electric plant machine for the year ending 31st December 20X6.

Expert Solution

Part A

	Amount	Multiply: interest rate	Interest
10% Bank loan repayable	120	10.0%	12.00
9.5% Bank loan repayable	80	9.5%	7.60
Total	200		19.60

Weighted average borrowing rate (19.60/200)		9.80%

Part B

First drawn down [Mar to Dec = 10 months] (30000000*10/12)	25,000,000
Second drawn down [Oct to Dec = 3 months] (20000000*3/12)	5,000,000
Average Accumulated capital Expenditure	30,000,000
Multiply: Weighted average borrowing rate	9.80%
Amount of borrowing costs that can be capitalised for the hydro-electric plant machine for the year ending 31st December 20X6	2,940,000

ekkarill92 answered 1 year ago

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