Question

Question 11

In early February 2020, Indigo Corp. began construction of an addition to its head office building that is expected to take 18 months to complete. The following 2020 expenditures relate to the addition:

Feb. 1		Payment #1 to contractor		$105,000
Mar. 1		Payment to architect		24,000
July 1		Payment #2 to contractor		63,000
Dec. 1		Payment #3 to contractor		186,000
Dec. 31		Asset carrying amount		$378,000

On February 1, Indigo issued a $105,000, three-year note payable at a rate of 10% to finance most of the initial payment to the contractor. No other asset-specific debt was entered into. Details of other interest-bearing debt during the period are provided in the table below:

Other Debt Instruments Outstanding—2020		Principal amount
8%, 15-year bonds, issued May 1, 2005, matured May 1, 2020		$303,000
7%, 10-year bonds, issued June 15, 2014		$496,000
6%, 12-year bonds, issued May 1, 2020		$303,000

What amount of interest should be capitalized for the fiscal year ending December 31, 2020, according to IAS 23? (Do not round intermediate calculations. Round capitalization rate to 2 decimal places, e.g. 52.75% and final answer to 0 decimal places, e.g. 5,275.)

Amount of interest

$

Answer 1

# Calculation of Weighted average Borrowing Cost

Debt	Principal amount	interest	date of issue	period outatnading for dec 31 2020	Weighted average principal amunt
8% debt	$303000	=$303000*8%*4/12 =$8080	may 1 2002 mature on may 1, 2020	4 months (january 2020 to december 2020)	=$303000*4/12 =$101000
7% bond	$496000	=$496000*7% =$34720	June 15, 2014	12months	=$496000*12/12 =$496000
6% Debt	$303000	=$303000*6%*8/12 =$12120	may 1,2020	8 months	=$303000*8/12 =$202000
TOTAL		$54920			$799000

Annualised weighted avereage generic borrowing rate =

=Total interest / Weighted avg.principal amount *100

=$54920/$799000 =6.87%

# Borrowing Cost Calculation-

Date	Cost ($)	Months upto 31 dec 2020	Specific borrowing used	specific interest cost(A)	generic borrowing used	Generic borrowing cost(B)	Total Borrowing cost(A+B)
Feb 1	$105000	11 months	$105000	=$105000*10%*11/12 =$9625	------	-----	$9625
March 1	$24000	10 months	-----	-----	$24000	=$24000*6.87%*10/12 =$1374	$1374
July 1	$63000	6 months	----	------	$63000	=$63000*6.87%*6/12 =$2164	$2164
Dec 1	$186000	1 month	----	------	$186000	=$186000*6.87%*1/12 =$1065	$1065
						Total Borrowing Cost	$14228

Hence $14228 of interest amount should be capitalised