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ACCA Strategic Professional · Strategic Business Reporting (International) · Non-current assets

Kappa Co obtained a $10m specific loan at 8% on 1 January 20X6 to build a plant. It spent $6m immediately and placed the remaining $4m on short-term deposit for the first 3 months, earning 3% per annum, before spending it on 1 April 20X6. Construction continued throughout the year. What borrowing cost should be capitalised for the year ended 31 December 20X6?

The capitalised amount is $770,000. Interest on the specific loan is $800,000 for the year, but IAS 23 requires investment income earned on temporarily surplus borrowed funds, here $30,000, to be deducted from the borrowing costs eligible for capitalisation.

  1. A$770,000Correct
  2. B$800,000
  3. C$780,000
  4. D$830,000

Explanation

Interest on the loan is $10m x 8% = $800,000. Investment income on the surplus is $4m x 3% x 3/12 = $30,000, which IAS 23 deducts from specific borrowing costs. Capitalised amount = $800,000 - $30,000 = $770,000. Option B ignores the investment income, and option D adds it instead of deducting.

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