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Question 3 (Marks: 14)   Q.3.2 Resonant Holdings owns a commercial shipping fleet and is in the...

Question 3 (Marks: 14)  

Q.3.2 Resonant Holdings owns a commercial shipping fleet and is in the process of refitting a container ship that was bought from a previous owner. They took ownership on 1 June 2020 and anticipate that it will take twelve months to complete the refurbishment at a total cost of R15 million.
One third of the project cost is to be financed by a specific loan at an interest rate of 6.5% and the balance will be financed from two general sources, namely debentures worth R10 million at an interest rate of 7.25% and a revolving loan costing 7%, also worth R10 million.  

The company expects to make three payments to the ship builders during the year as follows:

  • R4 000 000 on 1 June 2020
  • R5 000 000 on 1 October 2020
  • A final payment of R6 000 000 on 1 April 2021

Required:

Calculate the borrowing costs that Resonant Holdings will capitalise for the year ended 31 May 2021. (14)

Solutions

Expert Solution

Computation of Average accumulated Expenses
Date Amount of Expenditure Period to be considered while calculating Average expenditure Average expenditure
01-Jun-22                           40,00,000.00 12                              40,00,000.00
01-Oct-20                           50,00,000.00 8                              33,33,333.33
01-Apr-21                           60,00,000.00 2                              10,00,000.00
                      1,50,00,000.00 Average Accumulated Expenses                              83,33,333.33
Computation of Average interest rate based on the other outstanding debt of the other than specific borrowings
Source of loan Amount Rate Interest
7.25% debentures                       1,00,00,000.00 7.25%                                7,25,000.00
7% Resolving Loan                       1,00,00,000.00 7.00%                                7,00,000.00
                      2,00,00,000.00                              14,25,000.00
Average Interest rate =1425000/20000000 7.13%
Computation of interest on Average Accumulated expenses
Source of loan Amount Rate Interest To be capitallized
Specific Loan                           50,00,000.00 6.50%                                3,25,000.00
General sources                           33,33,333.33 7.13%                                2,37,500.00

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