Reference no: EM132960962
On January 1, 2021, Vanilla Corporation borrowed P5,000,000 at an interest rate of 10% specifically for the construction of its new building payable at the end of 5 years. The interest on the loan is payable at the end of each year.
Vanilla incurred the following costs in connection with the loan (assume incurred on January 1, 2021):
Commissions paid to its agent P200,000
Guarantee fees paid to its parent company,
Espresso Mocca, Inc. for the loan guarantee 1.5% of the loan amount
Bank charges 1.0% of the loan amount
Effective interest rate (interpolated) 11.8%
On the same date, Vanilla temporarily invested P3,000,000 of the proceeds for three months earning interest of 8% per annum. Vanilla had also the following other loans during the year for general purposes:
Principal
11% Short-term Note P1,000,000
13% Long-term Loan 600,000
The proceeds of these loans were partly used for the construction of the building. The interests on these loans are payable every December 31 as well. As early as January 1, 2021, the entity already started the activities associated with obtaining permits prior to commencement of physical construction. The physical construction of the building began only on April 1, 2021.
Expenditures on the building were made as follows:
Principal
January 1, 2021 P1,500,000
April 1, 2021 3,500,000
July 1, 2021 3,200,000
October 1, 2021 2,300,000
December 31, 2021 1,000,000
The physical construction of the building was completed by the end of 2021. However, routine administrative work is still expected to continue up to the first quarter of the following year.
Problem 1: Compute the weighted average rate used to determine the amount of borrowing cost eligible for capitalization.
a. 11.00%
b. 12.10%
c. 11.75%
d. 12.55%
Problem 2: How much is the capitalized borrowing cost in 2021?
a. P679,650
b. P639,650
c. P682,588
d. P644,400
Problem 3: How much is the total cost of self-constructed asset?
a. P12,144,400
b. P12,182,588
c. P12,139,650
d. P12,179,650