Question

C. On 1st January 2018, Global Drilling Ltd entered into a GHS22million contract for the construction of an office complex at Tema. The building was completed at the end of December 2018. During the period, the following payments were made to the contractor:

Payment date

Amount

GHS’m 1 January 2018 2.00 31 March 2018 6.00

30 September 2018 12.00 31 December 2018 2.00 22.00

Global Drilling’s borrowings as at its year end of 31st December 2018 were as follows:

 10% 4-year Loan Note with simple interest payable annually, which relates specifically to the building project, loans outstanding at 31st December 2018 amounted to GHS7,000,000. Interest of GHS700,000 was incurred on these borrowings during the year, and interest income of GHS200,000

was earned on these funds while they were held in anticipation of payments.

 12.5% Five-year Loan Note with simple interest payable annually; debt outstanding at 1st January 2018 amounted to GHS10,000,000 and remained unchanged during the year.

 10% Five-year Loan Note with simple interest payable annually; debt outstanding at 1st January 2018 amounted to GHS15,000,000 and remained unchanged during the year

Required:

Calculate the borrowing costs to be capitalised.

Answer 1

The borrowing cost to be capitalised is :

• the borrowing cost eligible for capitalisation on the specific borrowing is the actual borrowing costs incurred on that borrowing during the period, less any investment income on the temporary investment of those borrowings
• The borrwoing cost eligible for capitalisation on the general borrowing is calculated by applying a weighted average borrowing cost rate on the average investment made during the year after applying specific borrowing.

Expenditures incurred in obtaining a qualifying asset are first allocated to any specific borrowings. The remaining expenditures are allocated to any general borrowings.

Statement showing calcualtion of general borrowings allocated to Expenditure

	Expenditure (in millions)	Amount allocated to general borrowings (in millions)	Weighted for period outstanding (in millions)
1January 2008	2	0	0*
31 March 2008	6	1*	1*9/12=0.75
30 September 2008	12	12	12*3/12=3
31 December 2008	2	2	2*0/12
	22 million		3.75 million

Specific borrowings of GHS 7,000,000 are fully utilised; remainder of expenditure is therefore allocated to general borrowings.

The capitalisation rate relating to general borrowings is the weighted average of the borrowing costs applicable to the entity’s borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Weighted average borrowing cost to be capitalised: 12.5%*(10/25)+10%(15/25)

=11%

	Amount (GHS in million)
Specific loan	0.7
General borrowings (GHS 3.75 MILLION*11%)	0.4125
Total	1.1125
Less interest income on specific borrwoings	.2
Amount eligible for capitalisation	1.3125

Borrowing cost to be capitalised=GHS 1,312,500