On 1 April 2018, Chofi Ltd (Chofi) borrowed GH¢15 million in order to partly fund the construction of a new building. The interest rate was 6% payable annually in arrears. On 1 July 2018, construction commenced. On 1 October 2018, GH¢10 million was paid to the contractor as the first stage payment. On 1 December 2018, a further GH¢10 million was paid to the contractor. Construction was still in progress at the reporting date of 31 March 2019.
Required:
In accordance with IAS 23: Borrowing Costs, show the appropriate calculations, the amount that should be capitalised in the financial statements of Chofi for the year end 31 March 2019. (4 marks)
View Solution
IAS 23 requires that three conditions be met before capitalization of finance costs takes place. These are
- finance costs are being incurred;
- activities necessary to bring the asset into use are under way; and
- expenditure has been incurred.
On this basis all three are met only on the payment of the first GH¢10 million to the contractor on 1 October 2018. The finance cost on this amount from 1 October 2018 to 31 March 2019 should be capitalised (GH¢10m * 6% * 6/12), amounting to GH¢300,000. (2 marks)
On 1 December 2018 a further GH¢10 million was paid to the contractor. However only GH¢5 million of this was borrowed. Hence (GH¢5m * 6% * 4/12) GH¢100,000 should be capitalised. (2 marks)
Determination of finance costs to be capitalized for 6 months from 01/10/2018 to 31/03/2019
Determination of further finance costs to be capitalized for 4 months from 01/12/2018 to 31/03/2019