Question

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)

Answer 1

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
		Interest to be capitalized	5,62,500.00