A company started construction of a new factory on February 1, 2015. The cost of $18,000,000 was paid in full to the contractor on February 1, 2015 and was financed from existing public borrowings. Construction was completed on September 30, 2015. Borrowings during 2015 included:
Bank A - 6% 8,000,000
Bank B - 6,000,000
Bank C - 7 30,000,000
10,000
How much of the borrowing cost should be capitalized in respect of the factory?

To determine the amount of borrowing costs that should be capitalized in respect of the factory, we need to calculate the weighted average interest rate of the borrowings and then apply it to the amount of time and the cost of the factory.

### Steps to Solve:

1. **Determine the interest rates on the loans:**
   - Bank A: 6% on $8,000,000
   - Bank B: 6% on $6,000,000
   - Bank C: 7% on $30,000,000

2. **Calculate the total interest cost for each loan:**
   \[
   \text{Interest from Bank A} = 8,000,000 \times 0.06 = 480,000
   \]
   \[
   \text{Interest from Bank B} = 6,000,000 \times 0.06 = 360,000
   \]
   \[
   \text{Interest from Bank C} = 30,000,000 \times 0.07 = 2,100,000
   \]

3. **Calculate the total borrowings and the total interest cost:**
   \[
   \text{Total borrowings} = 8,000,000 + 6,000,000 + 30,000,000 = 44,000,000
   \]
   \[
   \text{Total interest cost} = 480,000 + 360,000 + 2,100,000 = 2,940,000
   \]

4. **Calculate the weighted average interest rate:**
   \[
   \text{Weighted average interest rate} = \frac{\text{Total interest cost}}{\text{Total borrowings}} = \frac{2,940,000}{44,000,000} = 0.06681818 \text{ or } 6.6818\%
   \]

5. **Calculate the borrowing cost to be capitalized:**
   - The factory construction cost is $18,000,000.
   - The construction period is from February 1, 2015, to September 30, 2015, which is 8 months out of 12 (or $\frac{8}{12}$).

   \[
   \text{Capitalized borrowing cost} = 18,000,000 \times 0.06681818 \times \frac{8}{12} = 18,000,000 \times 0.06681818 \times 0.6667 = 800,727.3
   \]

### Conclusion:
The amount of borrowing cost that should be capitalized in respect of the factory is **$800,727.30**.

Would you like more details, or do you have any questions?

### Related Questions:
1. How does the capitalization of borrowing costs affect a company's financial statements?
2. What is the impact of different interest rates on the weighted average cost of capital?
3. What are the criteria for capitalizing borrowing costs under accounting standards?
4. How would the capitalization change if the construction took more or less time?
5. What would happen if the construction was funded entirely by equity instead of borrowings?

### Tip:
Capitalizing borrowing costs increases the value of the asset on the balance sheet, but also delays the recognition of expenses in the income statement.

Learn how to calculate the borrowing costs to be capitalized for a factory construction project. This problem involves determining the weighted average interest rate of multiple loans and applying it to the construction cost over a specified period. Suitable for professionals and financial analysts.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation