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Financial accounting-ii (mgt401) Assignment no.1 November semester fall 2013
Due Date: December 02, 2013
Marks: 20
Learning Objective
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The students are expected to learn the application of the provisions of IAS 23 (Borrowing Cost)
Learning Outcomes
After going through this activity, the students would be able to apply IAS 23 in its true meanings.
Case
Model Construction Limited (MCL) was established in 2005. During its emergence, it entered itself in construction industry as a residential constructor. In 2012, it changed its focus towards commercial building & development. Now company is well reputed in constructing different fast food restaurants, showrooms, shopping malls, manufacturing warehouses and different other types of buildings. MCL has also completed various challenging renovation projects with great excellence. Recently company has started a project to build a bridge that will take 3 years for completion. Total budget required for construction would be Rs. 30 million. Company decided to use multiple sources of borrowings to finance its project. It borrowed Rs. 32 million and used surplus funds of Rs. 2 million for its other administrative purposes. Funds were arranged in the following manner:
Borrowings from bank: Rs. 8 million @ 5% per annum
Usage from existing running borrowings:
Borrowing A - Rs. 4 million @ 6.50% per annum
Borrowing B - Rs. 6 million @ 6.75% per annum
Corporate bonds: Rs. 14 million @ 7% per annum
At first stage of the project, company has idle funds of Rs. 12 million which were invested by the company for a period of 5 months. Total return from this investment was Rs. 600,000.
Required:
Assume that company is adopting allowed alternative treatment under IAS 23 then:
(a) How it will treat the borrowing cost? (5 Marks)
(b) What will be total borrowing cost? (10 Marks)
(c) Calculate the amount of borrowing cost to be capitalized? (5 Marks)