b Rookie plc a company with a 31st Dec yearend had the follo

b) Rookie plc, a company with a 31st Dec year-end, had the following general borrowings in place at the beginning and end of 20X6. 1 January 31 December 20X6 20X6 120 10% Bank loan repayable 20X8 9.5% Bank loan repayable 20X9 120 80 80 On 1 March 20X6, Rookie plc began construction of a qualifying asset, a piece of machinery for a hydro-electric plant, using existing borrowings. Expenditure drawn down for the construction was £30million on 1 March 20X6 and £20million on 1 October 20X6. Calculate the amount of borrowing costs that can be capitalised for the hydro-electric plant machine (and clearly show your workings). 4 marks

Solution

Calculation of Weighted Average funds used for the Qualifying Asset: Date Expenditure Capitalization Period Weight Weighted Expenditure A B C=B/12 A*C 01 March 20X6 30 10 Months 0.833333333 25 01 October 20X6 20 3 Months 0.25 5 Total 30 Calculation of Weighted Average Interest rate on the General Loans: Loan Principal Rate Annual Interest 10% Bank Loan 120 10% 12 9.5% Bank Loan 80 9.50% 7.6 200 19.6 Weighted Average Interest Rate= 19.6/200 Weighted Average Interest Rate= 9.80% Interest to be Capialized: W. AvFunds Used 30.00 Less: Specific Loan 0.00 General Loan 30.00 W Av Int Rate 9.80% Interest Cost 2.94 (30*9.8%)