SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

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REVIEW HANDOUTS AND MATERIALS

SEMESTER FIRST SEMESTER SCHOOL YEAR 2020-2021
SUBJECT FINANCIAL ACCOUNTING AND REPORTING
HANDOUT # MIXED 013
TOPIC GOVERNMENT GRANTS AND BORROWING COSTS

Summary of IAS 20

Objective of IAS 20

The objective of IAS 20 is to prescribe the accounting for, and disclosure of, government grants and other forms of
government assistance.

Scope

IAS 20 applies to all government grants and other forms of government assistance. [IAS 20.1] However, it does not
cover government assistance that is provided in the form of benefits in determining taxable income. It does not cover
government grants covered by IAS 41 Agriculture, either. [IAS 20.2] The benefit of a government loan at a below-
market rate of interest is treated as a government grant. [IAS 20.10A]

Accounting for grants

A government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any
conditions attached to the grant and (b) the grant will be received. [IAS 20.7]

The grant is recognized as income over the period necessary to match them with the related costs, for which they
are intended to compensate, on a systematic basis. [IAS 20.12]

Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although recording
both the asset and the grant at a nominal amount is also permitted. [IAS 20.23]

Even if there are no conditions attached to the assistance specifically relating to the operating activities of the entity
(other than the requirement to operate in certain regions or industry sectors), such grants should not be credited to
equity. [SIC-10]

A grant receivable as compensation for costs already incurred or for immediate financial support, with no future
related costs, should be recognized as income in the period in which it is receivable. [IAS 20.20]

A grant relating to assets may be presented in one of two ways: [IAS 20.24]
• as deferred income, or
• by deducting the grant from the asset's carrying amount.

A grant relating to income may be reported separately as 'other income' or deducted from the related expense. [IAS
20.29]

If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant related to
income, the repayment should be applied first against any related unamortized deferred credit, and any excess
should be dealt with as an expense. Where the original grant related to an asset, the repayment should be treated
as increasing the carrying amount of the asset or reducing the deferred income balance. The cumulative
depreciation which would have been charged had the grant not been received should be charged as an expense.
[IAS 20.32]

Page 1 of 13
Disclosure of government grants

The following must be disclosed: [IAS 20.39]

• accounting policy adopted for grants, including method of balance sheet presentation
• nature and extent of grants recognized in the financial statements
• unfulfilled conditions and contingencies attaching to recognized grants

Government assistance

Government grants do not include government assistance whose value cannot be reasonably measured, such as
technical or marketing advice. [IAS 20.34] Disclosure of the benefits is required. [IAS 20.39(b)]

Government Grant Theories

1. IAS 20 deals with:

a. Tax benefits provided to a firm in relation to Government Grants.
b. Government participation in the ownership of firms.
c. Disclosure of government grants.

2. Government assistance includes, except:

a. Indirect help, such as improving local infrastructure.
b. Direct action to provide economic benefits to qualifying firms.
c. Imposing import tariffs.

3. Government grants are defined as:

a. A transfer of resources to qualifying firms.
b. Transactions with the government in the normal course of trade.
c. Provision of guarantees by the government.

4. A qualifying firm may receive grants related to the assets from the government, when it:
a. Buys long-term assets.
b. Builds long-term assets.
c. Acquires long-term assets.
d. Buys, builds, or acquires long-term assets.

5. Government grants may be given in more than one form. They may be given as:
A. Grants related to assets.
B. Grants related to income.
C. Forgivable loans.
a. A only
b. b and c only
c. a, b and c

6. Fair Value of an asset is defined as that value for which:

a. An asset is acquired from a related party.
b. An asset is sold between willing independent traders.
c. A liability is extinguished between willing independent traders.
d. a and b
e. b and c
f. a, b and c

7. Which of the following may be categorized as purposes of government assistance? Tick all that apply.
a. Boosting capital by investing in specified assets.
b. Reduce unemployment by subsidizing jobs and training.
c. Try to promote economic activity in specific regions
d. a and b
e. b and c
f. a, b and c

8. The impact of government assistance on financial statements is which of the following:

a. Financial statements must ignore all assistance.
b. Financial statements must show only 10% of total assistance.
c. Financial Statements must be able to reflect the receipt of government assistance.

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9. The recognition of government grants should only be made if:
a. It is likely that the firm will comply with the qualifying conditions.
b. The grants will be received.
c. The grants will never be repaid under any circumstances.
d. a and b
e. b and c
f. a, b and c

10. On the notification that a firm will receive a grant:

a. An account receivable will be set up, but the grant will be recorded on a cash basis.
b. Do nothing until the cash arrives.
c. An account receivable will be set up, and the grant will be recorded on an accrual basis.

11. If a firm does not comply with the conditions of a government loan, then this may result in the need:
a. To repay the loan.
b. To record a contingent liability in the future.
c. To account for the loan on a cash basis only.
d. a and b
e. b and c
f. a, b and c

12. If the grants are intended to compensate certain costs, then they should be:
a. Only entered in the books when those costs are incurred.
b. Recognized as income over the periods when the related costs are incurred.
c. Ignored.

13. If grants relate to depreciable assets:

a. They should not be recognized at all since the asset will have no value eventually.
b. Credited immediately to Other income.
c. Recognized as income in the periods in which the depreciation is charged.

14. Where there is a combination of assistance:

a. 1.It may be necessary to split the grant into parts, and recognize the income of the parts on different
bases.
b. 2. If the cash is received together, treat it as one grant, otherwise split the grant into parts.
c. 3. Account for the grants by location.

15. When a grant is given for immediate financial support, or as compensation for costs already incurred:
a. One half is to be recognized in the current period while the other half is to be recognized in the next
period.
b. It should be capitalized, as there are no matching costs.
c. It should be recognized in the period it becomes receivable.

16. The capital approach and the income approach are two forms of accounting treatment that may be applied
to grants. These should be applied:
a. Before deciding how much of each grant should be recognized in each period.
b. After deciding how much of each grant should be recognized in each period.
c. Only if the grant is received in cash.

17. Both the capital approach and the income approach give differing accounting treatments to a grant.
However, a point of similarity between the two approaches is to:
a. Credit the amount of the grant to shareholders’ funds.
b. Show only the portion of the grant relating to the period.
c. Take the grant to the income statement.

18. When the grant is in the form of land, or other non-monetary assets, then it should:
a. Be entered in the books at fair value, matched by the grant.
b. Not be entered in the books at fair value, since it is a gift.
c. Be entered in the books at fair value, matched by a contingent liability.

19. A grant can be shown as a deferred income on a balance sheet, and then:
a. Shown as sundry expense, over the periods matching the asset’s life.
b. Recognized as income, over the periods matching the asset’s life.
c. Amortized directly to equity, over the periods matching the asset’s life.

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20. An alternate treatment, with respect to presentation of grants related to assets, may be that they are shown as:
a. An addition to the carrying amount of the asset.
b. Goodwill.
c. A deduction from the carrying amount of the asset.

21. If part, or all, of a grant becomes repayable to the government then:

a. The firm should use that amount to set up a subsidiary.
b. The repayment should first be shown as an expense.
c. The repayment should first be matched against any remaining deferred income relating to the grant.

Government Grants Problems

Use the following information to answer the next four questions:

On January 1, 20x1, HALIMAW Co. received cash of ₱16,000,000 from a local government to be used in
constructing a building. The construction was completed on December 31, 20x1 for a total cost of ₱40,000,000. The
building will be depreciated over 20 years.

1. If HALIMAW Co. uses the gross presentation of government grants, how much is the carrying amount of the
deferred income from the government grant on December 31, 20x5?

2. If HALIMAW Co. uses the net presentation of government grants, how much is the carrying amount of the
deferred income from the government grant on December 31, 20x5?

3. If HALIMAW Co. uses the gross presentation of government grants, how much is the carrying amount of the
building on December 31, 20x1?

4. If HALIMAW Co. uses the net presentation of government grants, how much is the carrying amount of the
building on December 31, 20x1?

Use the following information for the next four questions:

On January 1, 20x1, ASTIG Co. received cash of ₱16,000,000 from a local government to be used to defray safety
and other hazard-related costs over a five-year period. It was estimated that such costs will total ₱32,000,000 over
the next five years. In 20x1 and 20x2, actual costs of safety and other hazard-related costs amounted to ₱4,000,000
and ₱4,800,000, respectively.

5. If ASTIG Co. uses the gross presentation of government grants, how much is the carrying amount of the
deferred income from the government grant on December 31, 20x1?

6. If ASTIG Co. uses the net presentation of government grants, how much is the carrying amount of the deferred
income from the government grant on December 31, 20x1?

7. If ASTIG Co. uses the gross presentation of government grants, how much safety expense is recognized in 20x1?

8. If ASTIG Co. uses the net presentation of government grants, how much is safety expense is recognized in 20x1?

9. On January 1, 20x1, SUGO Co. received land from the government with the condition that a factory building
should be constructed and operated on it. The fair value of the land was estimated at ₱20,000,000. The
construction of the factory building was completed on January 1, 20x2 for a total cost of ₱80,000,000. The
building will be depreciated using SYD over a useful life of 10 years. The estimated residual value is ₱8,000,000.
SUGO Co. uses the gross presentation of government grants. How much is the carrying amount of the deferred
income from the government grant on December 31, 20x2?

10. On January 1, 20x1, various properties of CHUCK Co. were destroyed due to flood. It was estimated that the
cost of the destroyed properties amounted to ₱60,000,000. On July 1, 20x1, CHUCK received ₱8,000,000 from
the government as a financial aid. CHUCK Co. estimates that it would take about 5 years before it can recover
from the loss.
How much is the income from government grant recognized in 20x1?

8,000,000 = THE GOVT GRANT IS AN IMMEDIATE FINANCIAL SUPPORT NOT SUBJECT TO CONDITIONS

11. On January 1, 20x1, because of an exemplary accomplishment that brought international recognition to the
community, the government waived the repayment of NIKE Co.’s loan payable with a carrying amount of
₱800,000 and remaining term of 4 years. How much income from government grant is recognized in 20x1?

800,000 = THE AMOUNT OF LOAN FORGIVEN

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12. On January 1, 20x1, CHRIS Co. was granted by the government a 3-year, zero-interest loan of ₱4,000,000
payable on December 31, 20x3. Prevailing interest rate for this type of loan is 10%. How much is the income
from government grant recognized in 20x1?

CASH 4,000,000
DISCOUNT ON L/P 994,741
LOANS PAYABLE 4,000,000
Deferred INCOME FROM GOV’T GRANT 994,741

INTEREST EXPENSE 300,526

DISCOUNT ON L/P 300,526

Deferred Income 300,526

Income from Gov’t Grant 300,526

13. On January 1, 20x1, CENA Co. received cash of ₱16,000,000 from the government to be used to defray safety
and other hazard-related costs over a five-year period. It was estimated that such costs will accumulate to
₱32,000,000 over the next five years. In 20x1 and 20x2, actual costs of safety and other hazard-related costs
amounted to ₱4,000,000 and ₱4,800,000, respectively. On January 1, 20x3, the government demanded
repayment of the ₱16,000,000 given as grant in 20x1. How much is the loss on repayment of government grant
recognized in 20x3?

DEFERRED INCOME 11,600,000

LOSS 4,400,000
CASH 16,000,000

14. On January 1, 20x1, HUNTER Co. received cash of ₱16,000,000 from the government to be used in constructing
a building. The construction was completed on December 31, 20x1 for a total cost of ₱40,000,000. The building
is depreciated over 20 years. On January 1, 20x4, the government demanded repayment of the ₱16,000,000
grant given as grant in 20x1. How much is the loss on repayment of government grant recognized in 20x4?

DEFERRED INCOME 14,400,000

LOSS 1,600,000
CASH 16,000,000

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 Summary of IAS 23

Objective of IAS 23

The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing costs include interest
on bank overdrafts and borrowings, finance charges on finance leases and exchange differences on foreign
currency borrowings where they are regarded as an adjustment to interest costs.

Key definitions

Borrowing cost may include: [IAS 23.6]

• interest expense calculated by the effective interest method under IAS 39,
• finance charges in respect of finance leases recognized in accordance with IAS 17 Leases, and
• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an
adjustment to interest costs

This standard does not deal with the actual or imputed cost of equity, including any preferred capital not classified
as a liability pursuant to IAS 32. [IAS 23.3]

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. [IAS 23.5]
That could be property, plant, and equipment and investment property during the construction period, intangible
assets during the development period, or "made-to-order" inventories. [IAS 23.6]

Scope of IAS 23

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

• qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agriculture
• inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and that
take a substantial period to get ready for sale (for example, maturing whisky)

Accounting treatment

Recognition

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form
part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs are recognized as an
expense. [IAS 23.8]

Measurement

Where funds are borrowed specifically, costs eligible for capitalization are the actual costs incurred less any income
earned on the temporary investment of such borrowings. [IAS 23.12] Where funds are part of a general pool, the
eligible amount is determined by applying a capitalization rate to the expenditure on that asset. The capitalization
rate will be the weighted average of the borrowing costs applicable to the general pool. [IAS 23.14]

Capitalization should commence when expenditures are being incurred, borrowing costs are being incurred and
activities that are necessary to prepare the asset for its intended use or sale are in progress (may include some
activities prior to commencement of physical production). [IAS 23.17-18] Capitalization should be suspended during
periods in which active development is interrupted. [IAS 23.20] Capitalization should cease when substantially all of
the activities necessary to prepare the asset for its intended use or sale are complete. [IAS 23.22] If only minor
modifications are outstanding, this indicates that substantially all of the activities are complete. [IAS 23.23]

Where construction is completed in stages, which can be used while construction of the other parts continues,
capitalization of attributable borrowing costs should cease when substantially all of the activities necessary to
prepare that part for its intended use or sale are complete. [IAS 23.24]

Disclosure [IAS 23.26]

• amount of borrowing cost capitalized during the period
• capitalization rate used

Page 6 of 13
Practical Application

Borrowing cost = interest on borrowings

Treatment of borrowing cost

a. Expensed in general
b. Capitalized for qualifying assets

Qualifying asset
= assets that will take substantial period before it is prepared or ready for its INTENDED USE

Criteria for capitalization

All of the ff must be satisfied:
a. Cost must be incurred
a. Cash paid
b. Exchange of asset
c. Incurrence of interest-bearing liability
b. Borrowing must be incurred
c. Activities are conducted in the qualifying asset (temporary delay -normal delays or stoppage
of work is allowed)

Borrowing cost computation

1. Specific borrowings = interest expense – investment income

2. General borrowings = WAEX x CAPRATE, where CAPRATE = average interest rate of all general borrowings
3. Mixed = (WAEX-SB) x CAPRATE

Theory Questions

1. Borrowing costs can be capitalized:

a. Always
b. Never
c. Sometimes

2. Interest on Bank overdrafts, short term and long-term borrowings are the only items included in borrowing costs.
a. True
b. False

3. A Qualifying asset includes

a. Inventories converted for sale in a short time
b. Assets ready for sale, or use when acquired
c. Maturing whisky

4. Renting out an upgraded office building that you have purchased is an example of an investment property.
This is an example of an asset that does not qualify.
a. True
b. False

5. Borrowing costs should be recognized as an expense and written off in the period they are incurred.
a. Only if the asset qualifies
b. When using pooled funds.
c. If the borrowing costs relate to current fast-moving inventory.

6. The basis for treating Borrowing costs should be:

a. Cash basis only
b. Accruals basis only
c. Mixture of 1&2

7. Borrowings can only be capitalized when it is likely that they will generate future economic benefits
a. True
b. False

8. Other borrowing costs, those which cannot be capitalized, should be recognized as an expense and written off
in the period of incurrence.
a. True
b. False

Page 7 of 13
9. Investment income generated from loans taken in order to finance a qualifying asset should be:
a. Deducted from borrowing costs
b. Added to borrowing costs
c. Shown as Investment income in the Income Statement

10. The amount of borrowing costs capitalized will always exceed the total borrowing costs incurred in that period.
a. True
b. False

11. The general pool of funds used to complement borrowings for a qualifying asset may relate just to the
subsidiary. If this is the case, then use the weighted average cost relating just to the borrowings of the
subsidiary.
a. True
b. False

12. The recoverable amount of an asset is defined as:

a. The asset’s resale value.
b. Its value to the firm as it is stored away in the warehouse.
c. Its value to the firm for internal use.
d. a and b only
e. a and c only

13. When capitalizing borrowing costs there is a risk that the cost of an asset may be inflated above its recoverable
amount. Any excess of borrowing costs, above the recoverable amount should be:
a. Ignored
b. Written off
c. Treated as an income

14. Capitalization is only started when:

a. Costs are being incurred for the asset
b. Borrowing costs are being incurred
c. Action is being taken to prepare the asset for use of sale
d. a and b only
e. a, b and c
f. b and c only

15. The total cost of a qualifying asset is increased by any progress payments received or any government grants
a. True
b. False

16. Capitalization is also allowed on assets being held, with no present activity, for future development.
a. True
b. False
17. Capitalization is suspended if the delays in the development of an asset are
a. Temporary
b. Permanent
c. Both of a & b above
d. Neither of a & b above

18. Capitalization is suspended if active development of an asset is suspended for an extended period of time.
a. True
b. False

19. When the building of a qualifying asset is being completed in many parts and each part can be used
independently of other parts, which are still being built, then:
a. Capitalization should be applied on the eventual complete asset.
b. Capitalization should be applied for each part separately
c. Neither of 1 or 2.

Page 8 of 13
Borrowing Cost Problems

1. You are building a bridge costing P200 million. P120 million is financed from a long-term loan costing 8%.
The remaining P80 million comes from a pool of loans. 35% of the pooled loans cost 10%. 65% of the pooled loans
cost 12%. Using this information find the cost of borrowings for the first year, the average borrowing rate of the
project and the weighted average of the pool of loans.

WEIGHTED AVERAGE EXPENDITURES 200,000,000.00

SPECIFIC BORROWINGS 120,000,000.00 X 8% 9,600,000.00
GENERAL BORROWINGS 80,000,000.00 X 11.30% 9,040,000.00
9.32% 18,640,000.00

CAPITALIZATION RATE 0.1130

TOTAL INTEREST OF POOLED LOANS 9,040,000.00
TOTAL PRINCIPAL 80,000,000.00

2. The recoverable amount of a machine may be defined as its value to the firm for internal use or its resale value.
The Recoverable Amount of a machine = P120.000. It is a qualifying asset. Its average carrying cost for the period =
P114.000. P20.000 of the borrowing costs for the period relate to this machine. What then is the amount that can
be capitalized and how much must be written off?

TOTAL COST = 114,000 + 20,000 = 134,000

CAPITALIZABLE COST = 120,000
WRITE OFF = 14,000
CAPITALIZE 6,000 OF THE BORROWING COSTS AND THE 14,000 IS EXPENSED

3. Vin Diesel Company borrowed P16,000,000 to finance the construction of its building on July 1, 20x1. The loan
shall be repaid commencing the month following completion of the building. Expenditures for the partially
completed structure totaled P9,600,000 during the year-ended June 30, 20x2. Assume that these expenditures
were incurred evenly throughout the year. Vin Diesel Company earned interest of P320,000 for the year on the
unexpended portion of the loan and annual interest rate is 3%. What amount of interest shall be capitalized to
the building?

SPECIFIC BORROWING

CAPITALIZABLE BORROWING COST = INTEREST EXPENSE – INCOME EARNED FROM UNEXPENDED PORTION
= 480,000 – 320,000
=160,000

4. Bilbo Baggins Company started construction on a building on January 1 of the current year and completed
construction on December 31 of the same year. The company had only two interest-bearing notes outstanding
during the year, and both of these notes were outstanding for all 12 months of the year. The following information
is available:
Average accumulated expenditures 2,500,000
Ending balance of construction in progress
before capitalization of interest 3,600,000
6% note incurred specifically for the project 1,500,000
9% long term note 5,000,000

How much is the capitalizable interest?

SPECIFIC AND GENERAL BORROWINGS

CAPITALIZABLE BORROWING COST = WEIGHTED AVERAGE EXPENDITURES x CAPITALIZATION RATE

WEIGHTED AVERAGE EXPENDITURE = 2,500,000

SPECIFIC BORROWINGS =1,500,000 X6% = 90,000
GENERAL BORROWINGS =1,000,000 X9% = 90,000
TOTAL 180,000

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5. On January 1, 20x1, AAA Co. borrowed ₱20 million to finance the construction of a new building. Interest is
payable on the loan at 8%. Stage payments were due throughout the construction period and therefore
excess funds were invested during that period. By the end of the project on December 31, 20x1, investment
income of ₱600,000 had been earned. How much is the capitalizable borrowing cost?

SPECIFIC BORROWING

CAPITALIZABLE BORROWING COST = INTEREST EXPENSE – INCOME FROM UNEXPENDED PORTION

= 1,600,000 – 600,000
= 1,000,000

6. On January 1, 20x1, BBB Company had the following borrowings made for general purposes and a part of the
proceeds was used to finance the construction of a qualifying asset.
Principal
12% short-term note ₱ 40,000,000
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000

The construction of the qualifying asset was started on immediately and expenditures incurred on the qualifying
asset were as follows:
Jan. 1 ₱19,200,000
Mar. 31 8,800,000
July 30 14,000,000
October 1 21,600,000
December 31 1,200,000

How much is the capitalizable borrowing cost?

GENERAL BORROWINGS

CAPITALIZABLE BORROWING COST = WEIGHTED AVERAGE EXPERNDITURES x CAPITALIZATION RATE

WEIGHTED AVERAGE EXPENDITURE

19,200,000 X 12/12
8,800,000 X 9/12
14,000,000 X 5/12
21,600,000 X 3/12
1,200,000 X 0/12
TOTAL 37,033,333

CAPITALIZATION RATE = TOTAL INTEREST / TOTAL PRINCIPAL

= 28,960,000/ 200,000,000
= 14.48%

CAPITALIZABLE BORROWING COST = 37,033,333 X 14.48%

= 5,362,427

7. On January 1, 20x1, CCC Company had the following borrowings made for general purposes and a part of the
proceeds was used to finance the construction of a qualifying asset.
Principal
12% short-term note ₱ 40,000,000
14% bank loan (3-year) 72,000,000
16% note payable (5-year) 88,000,000

The construction started on January 1 and was completed on December 20x1. The total cost of construction was
₱72,000,000 which was incurred evenly during the year. How much is the capitalizable borrowing cost?

GENERAL BORROWINGS

CAPITALIZABLE BORROWING COST = WEIGHTED AVERAGE EXPENDITURES x CAPITALIZATION RATE

WEIGHTED AVERAGE EXPENDITURE = 72,000,000 / 2

= 36,000,000

CAPITALIZATION RATE = TOTAL INTEREST / TOTAL PRINCIPAL

= 28,960,000/ 200,000,000
= 14.48%

CAPITALIZABLE BORROWING COST = 36,000,000 X 14.48%

= 5,212,800

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8. On January 1, 20x1, DDD Co. contracted for the construction of a building for ₱80,000,000 on a land that it had
previously purchased. The building was completed on December 20x1. The following payments were made to
the contractor:
Payment date Amount
January 1, 20x1 ₱ 8,000,000
March 31, 20x1 24,000,000
September 30, 20x1 40,000,000
December 31, 20x1 8,000,000

The following represents the borrowings of DDD Co. as of December 31, 20x1.
▪ 10%, ₱28,000,000, 4-year note dated January 1, 20x1 with simple interest payable annually, specifically
borrowed to finance the construction project. Interest income earned on the temporary investment of the
proceeds is ₱480,000.
▪ 12.5%, ₱40,000,000, 10-year note dated January 1, 20x1 with interest payable annually
▪ 10%, ₱60,000,000, 10-year note dated December 31, 19x9 with interest payable annually

How much is the capitalizable borrowing cost?

SPECIFIC AND GENERAL BORROWINGS

WEIGHTED AVERAGE EXPENDITURES

8,000,000 X 12/12
24,000,000 X 9/12
40,000,000 X 3/12
8,000,000 X 0/12
36,000,000

CAPITALIZATION RATE = 11%

WAEX 36,000,000
SPECIFIC BORROWING 28,000,000 X 10% - 480,000 = 2,320,000
GENERAL BORROWINGS 8,000,000 X 11% = 880,000
TOTAL 3,200,000

9. EEE Co. started construction of a new office building on January 1, 20x1. Funds borrowed specifically for the
construction the building is ₱8,000,000 accruing interest at 10% annually. However, a part of the borrowing is
used for other business requirements during the year. Investment income earned on temporary investments of
proceeds from the borrowing amounted to ₱48,000 which was received in cash on September 1, 20x1.
Expenditures on the building amounted ₱7,200,000 which was incurred evenly during the year. How much is the
capitalizable borrowing cost?

SPECIFIC BORROWINGS USED FOR GENERAL PURPOSES

WAEX 3,600,000
LESS: 48,000 X 4/12 16,000
NET WAEX 3,584,000
X CAP RATE 10%
CAPITALIZABLE BORROWING COST 358,400

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10. FFF Co. started construction of a qualifying asset for GGG, Inc. on January 1, 20x1. The following were
expenditures incurred on the construction.
Date Expenditures
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000

• Included in the January 1, 20x1 expenditures is cost of materials purchased on account for ₱400,000. The
account was settled on July 1, 20x1.
• Included in the May 1, 20x1 expenditures is ₱40,000 cost of materials obtained in exchange for old equipment.

Progress billings during the year are as follows:

Date of billing Amount billed Date billings were collected
April 1, 20x1 800,000 June 1, 20x1
September 1, 20x1 2,400,000 November 1, 20x1

• Payments on billings are subject to 10% withholding by GGG, Inc.

• FFF Co. determined the capitalization rate to be 10%.

How much is the capitalizable borrowing cost?

WAEX
3,600,000 X 12/12
400,000 X 6/12
1,800,000 X 8/12
2,880,000 X 1/12 5240000

LESS:
720,000 X 7/12
2,160,000 X 2/12
NET WAEX 4,460,000
X CAP RATE 10%
CAPITALIZABLE BORROWING COST 446,000

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Use the following information for the next four questions:
HHH Co. started construction of a qualifying asset for III, Inc. on January 1, 20x1. The following were expenditures
incurred on construction.

Date Expenditures
Year 20x1
January 1, 20x1 4,000,000
May 1, 20x1 1,800,000
December 1, 20x1 2,880,000

Year 20x2
January 1, 20x2 3,600,000
August 30, 20x2 1,200,000

Year 20x3
July 1, 20x3 2,400,000

HHH Co. determined the capitalization rate to be 10%. The construction of the qualifying asset was substantially
completed on September 30, 20x3.

11. How much is the capitalizable borrowing cost in 20x1?

12. How much is the capitalizable borrowing cost in 20x2?

13. How much is the capitalizable borrowing cost in 20x3?

14. How much is the total cost of the constructed qualifying asset on September 30, 20x3?

20X1
4,000,000 X 12/12
1,800,000 X 8/12
2,880,000 X 1/12
5,440,000
X10%
544,000

20X2
CARRIED FROM 20X1 9,224,000 X 12/12
3,600,000 X 12/12
1,200,000 X 4/12
13,224,000
X 10%
1,322,400

20X3
CARRIED FROM PY 15,346,400 X 9/9
2,400,000 X 3/9
16,146,400
X 10%
X 9/12
1,210,980

TOTAL COST 18,957,380

***end of handout***

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