b During the year to 31 December 2011 a company started work

b) During the year to 31 December 2011, a company started work on the construction of a manufacturing plant and incurred expenditure as follows 1 April 2011 1 August 2011 1 December 2011 £000 1,500 2,400 1,800 All of these payments were made out of general borrowings. Construction work was still underway at 31 December 2011. The company had the following general borrowings outstanding throughout the year 2011 Loan A Loan B oan Amount of loan (£000) 10,000 8,000 5,000 Interest for the year (£000) 1,150 720 430 Required Calculate the amount of borrowing costs that should be capitalised in relation to the construction of the manufacturing plant during the year 5 marks

Solution

IAS 23 Borrowing Costs requires that the borrowing costs directly attributable to the acquisition, construction and production of a qualifying asset should be capitalised.

For this purpose qualifying asset is the one which takes substantial time to get ready for its intended use. Which could be property, plant, equipment and investment property.

Therefore the borrowing cost to be capitalised is

1150+720+430= 2300 £ (000).