PROBLEM 1
On January 1, 2021 the company took a loan of P25, 000,000 in order to finance specifically the renovation of
building. The renovation work started on the same date. The loan carried annual interest at 10%. Work on the building
was substantially complete on November 30, 2021. The loan was repaid on December 31, 2021 and P200, 000 investment
income was earned in the period to November 30, 2021 on the proceeds of the loan not yet used for the renovation.
1. What amount of capitalizable borrowing cost should be included in the cost of the building?
2. What amount should be recorded as interest expense in 2021?
PROBLEM 2
The company was constructing an asset that qualified for interest capitalization. The construction began at the
beginning of the current year and was completed at the end of current year. The construction cost totalled P12, 500,000
and was incurred evenly during the current year. The entity had outstanding notes payable during the entire year of
construction comprising P6, 000,000, 8.2% interest and P9, 000,000, 9.5% interest. None of the borrowings were specified
for the construction of the qualified asset.
3. What amount of interest should be capitalized?
4. What amount should be reported as interest expense for the current year?
5. What is the cost of the new asset?
PROBLEM 3
The company had borrowed P21, 000,000 at 10% partly for general purposes and partly to finance the
construction of a building on January 1, 2021. The loan shall be repaid commencing the month following completion of
the building. Expenditures incurred evenly during the year for the completed building totalled P12, 000,000 on December
31, 2021. The entity earned interest of P200, 000 for the year on the unexpected portion of the loan.
6. What amount of interest should be capitalized on December 31, 2021?
7. If the loan was specifically borrowed to finance the construction, what amount should be the capitalizable
borrowing cost is ____________________and the cost of the completed new building is _________________
PROBLEM 4
On Independence Day of 2021, the company began construction of a new manufacturing plant. The plant was
completed on October 31, 2022. Expenditures on the project were:
July 1, 2021 5,000,000
October 1, 2021 4,000,000
February 1, 2022 3,000,000
April 1, 2022 2,000,000
September 1, 2022 2,000,000
October 1, 2022 500,000
8. What amount of interest should be capitalized in 2021?____________
9. What amount of interest should be capitalized in 2022?____________
10. What amount should be reported as interest expense for 2022?__________
11. What is the cost of completed new manufacturing plant?______________
PROBLEM 5
An entity had the following borrowings on January 1 of the current year. The borrowings were made for general
purposes and the proceeds were partly used to finance the construction of a new building.
12. How much is the capitalization rate?
13. How much is the average expenditure?
14. How much is the capitalizable borrowing cost?
15. How much is the cost of the building as of December 31 of the current year?
PROBLEM 6
At the beginning of 2018, an entity borrowed P1, 500,000 at an interest of 10% specifically for the construction
of a new building. The actual borrowing cost on this loan is P150, 000.The entity had also outstanding during the year
a 5-year 8% general borrowing of P7, 000,000.
16. How much is the average expenditure for 2018?
17. How much is the capitalizable borrowing cost for 2018?
18. How much is the cost of new building as of December 31, 2018?
19. How much is the average expenditure for 2019?
20. How much is the capitalizable borrowing cost for 2019?
21. How much is the cost of new building as of December 31, 2019?
