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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)

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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
Interest to be capitalized                                5,62,500.00

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