IAS 23 BORROWING COSTS   1

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IAS 23 BORROWING COSTS

 

1. Which of the following is a borrowing cost according to IAS 23?

A. Actual cost of equity shares.

B. Imputed cost of equity shares.

C. Dividends on preferred shares not classified as a liability.

D. Dividends on preferred shares not classified as a liability.

E. Finance charges in respect of finance leases recognized in accordance with IAS 17 Leases.

2. How shall an entity recognise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset?

A. As an equity

B. As an asset

C. An a liability

D. As an expense

 

3. A qualifying asset is an asset that necessarily takes __________ to get ready for its intended use or sale.

A. A substantial period of time

B. At least 6 months

C. At least 12 months

D. No more than 12 months

 

4. Which of the following cannot be a qualifying asset?

A. Power generation facilities

B. Manufacturing plants

C. Intangible assets

D. Financial assets

E. Investment properties

 

5. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

A. True

B. False

 

6. Aurora Ltd recently started the construction of a new gold mine. The company expects construction to take at least two years before the mine is ready for operation. It is also in the process of upgrading facilities at one of its existing mines, which is expected to take two months. Can the upgrade and the new mine be classified as qualifying assets under IAS 23?

A. Only the upgrade can be classified as a qualifying asset.

B. Only the new mine can be classified as a qualifying asset.

C. It depends on the entity’s accounting policy for borrowing costs.

D. The new mine, as well as the upgrade can be classified as a qualifying asset.

 

7. A cable company is building a cable network covering many franchise areas. The construction is carried out sequentially for each of the areas. Once the construction is completed in each franchise area, the network will be available for use there. The expenditure is being funded from a general pool of borrowings. When should the capitalization of borrowing costs cease for an individual franchise area?

A. When no further finance resources are available.

B. At the completion of that individual franchise area.

C. At the completion of substantially all of the franchise areas.

D. At the end of the entire project.

 

8. Mille Construction borrowed €50.000 on 1 July 2018 to construct a qualifying asset. The company has a year-end of 31 December 2018. The borrowings carry interest of 9% per annum. Expenditure of €45.000 was incurred on 1 July 2018 and the construction was still ongoing at 31 December 2018. Surplus funds were invested at 7% per annum. What amount of borrowing costs should be capitalized by Millennium Construction (Ignore the effect of compounding in calculating interest for simplicity)?

The amount of borrowing costs incurred for the year ended 31 December 2018 is………. Interest income of …….. was earned on the investment of surplus funds. The amount of borrowing cost to be capitalized is therefore…….. .

 

9. VERO CRUISE is building a new cruise liner that will take at least three years to complete. Read the following information, and then select the correct statements from the list below:

· On 1 January 2018, engineers started drawings fir the crise liner.

· On 1 July 2018, prototype scale models were built to identify the best design.

· On 1 January 2019, construction of the cruise liner started.

A. Capitalization of borrowing costs would start on 1 January 2018.

B. Capitalization of borrowing costs would start on 1 January 2019.

C. Capitalization of borrowing costs would start on 1 July 2018.

D. Engineers drawing is not considered an activity necessary to prepare the asset for its intended use under IAS 23.

 

10. Over the past two years, Modern Company has developed a computer software to be used internally and/or to be sold to prospective buyers. In accordance with IAS 38, the group capitalized the development costs incurred during the development phase and recognized an intangible asset of €1 million. If Modern Company borrows funds for the purpose of funding such software development, should it capitalize borrowing costs as part of the carrying amount of the internally generate intangible asset?

A. Yes, because intangible assets that take a substantial period of time to build are qualifying assets.

B. No, because only acquired tangible assets can be qualifying assets.

C. No, because IAS 23 states that intangible assets are not qualifying assets.

D. It depends on whether the computer software is to be used internally or sold to prospective buyers.

 

 

11. Company Y has incurred €850.000 in capital expenditure during the year, constructing a bottling plant for its beer division. At the year-end, €100.000 related to the construction of the plant is included in creditors. The bottling plant is funded from the entity’s pool of general loans (see below). The plant is considered to be a qualifying asset under IAS 23 Borrowing Costs, and the company therefor capitalizes borrowing costs related to the qualifying asset.

Y had borrowings outstanding for the year, as shown here

Borrowings	Maturity	Interest rate per annum (payable monthly)
Bond €100.000	Two years – principal repayable on maturity	15%
Long term loans €250.000	Three years – principal repayable on maturity	7%
Debentures , €1.000.000	Five years – principal repayable on maturity	8%

 

a. Calculate the borrowing costs to be capitalized.

b. Suppose that Y had not issued its debentures, and only had a bond and a long-term loan. Calculate the borrowing costs to be capitalized.

 

12. YUKKA Ltd. started the construction of an asset on 1 January 2019. For this purpose three loans were outstanding at the start of the year as follows:

	Amount, $’000	Interest Rate, %
Loan 1	80,000	11
Loan 2	70,000	15
Loan 3	40,000	17

The funds were used on the asset as follows:

	$’000
1 January 2019	25,000
1 May 2019	20,000
1 October 2019	15,000

The construction of the asset was completed on 31 December 2019.

Required:

(a) The Borrowing Cost eligible for capitalization at 31.12.2019. (b) The Cost of Asset to be reported in the statement of financial position at 31.12.2019