A company started to build a factory. The cost of 18,000,000 was paid to the contractor and was financed by public local loans, namely Bank A 8,000,000 at a rate of 6%, Bank B 10,000,000 at a rate of 6.6%, and Bank C. 30,000,000 at 7% How much borrowing cost should be capitalized in relation to the plant?

To calculate the borrowing cost that should be capitalized in relation to the construction of the factory, we need to determine the weighted-average interest rate on the loans and then apply this rate to the cost of the construction.

### 1. Calculate the Total Borrowing Amount
The company borrowed money from three banks:

- **Bank A**: $8,000,000 at 6%
- **Bank B**: $10,000,000 at 6.6%
- **Bank C**: $30,000,000 at 7%

The total borrowing is:

\[
\text{Total Borrowing} = 8,000,000 + 10,000,000 + 30,000,000 = 48,000,000
\]

### 2. Calculate the Weighted-Average Interest Rate
We calculate the interest cost for each loan and then the weighted-average interest rate.

#### a. Interest Cost for Each Loan:
- **Bank A**: $ 8,000,000 \times 6\% = 480,000 $
- **Bank B**: $ 10,000,000 \times 6.6\% = 660,000 $
- **Bank C**: $ 30,000,000 \times 7\% = 2,100,000 $

#### b. Total Interest Cost:
\[
\text{Total Interest Cost} = 480,000 + 660,000 + 2,100,000 = 3,240,000
\]

#### c. Weighted-Average Interest Rate:
\[
\text{Weighted-Average Interest Rate} = \frac{3,240,000}{48,000,000} \approx 6.75\%
\]

### 3. Calculate the Borrowing Cost to be Capitalized
Apply the weighted-average interest rate to the cost of the factory:

\[
\text{Borrowing Cost to be Capitalized} = 18,000,000 \times 6.75\% = 1,215,000
\]

### Final Answer:
The borrowing cost that should be capitalized in relation to the plant is **$1,215,000**.

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Do you want details or have any questions?

Here are 5 related questions that might interest you:
1. What factors influence the decision to capitalize borrowing costs?
2. How does the capitalization of borrowing costs affect the overall cost of an asset?
3. Can a company choose not to capitalize borrowing costs? What are the implications?
4. How is the weighted-average interest rate calculated if there are additional fees or discounts on the loans?
5. What are the differences between capitalizing interest under IFRS and GAAP?

**Tip:** When dealing with multiple loans, always compute the weighted-average interest rate to determine the appropriate amount of borrowing costs to capitalize.

Learn how to calculate the borrowing cost that should be capitalized in relation to constructing a factory. Understand the weighted-average interest rate concept and its application to finance costs. Detailed step-by-step solution provided.

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