IA 1 - Borrowing Cost (CHAP 25)

Question 1

Borrowing costs can be capitalized as cost of the asset when

a. The asset is a qualifying asset.

b. The asset is a qualifying asset and it is not probable that the borrowing cost will result in future beneits

c. The asset is a qualifving asset and it is probable that the borrowing costs will result in future economic benefits to the entity but the costs cannot be measured reliably

d. The asset is a qualifying asset and it is probable that the borrowing costs will result in future economic benefits to the entity and the costs can be measured reliably.

Answer 1

d. The asset is a qualifying asset and it is probable that the borrowing costs will result in future economic benefits to the entity and the costs can be measured reliably.

Question 2

If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is equal to

a. Actual borrowing cost incurred

b. Actual borrowing cost incurred up to completion of asset

c. Actual borrowing cost incurred up to completion of asset minus any investment income from the temporary investment of the borrowing

d. Zero

Answer 2

c. Actual borrowing cost incurred up to completion of asset minus any investment income from the temporary investment of the borrowing

Question 3

Which of the following assets could be treated as qualifying asset for the purpose of capitalizing borrowing costs?

a. Investment property

b. Investment in financial instrument

c. Inventory that is manufactured or produced in large quantity on a repetitive basis

d. Biological asset

Answer 3

a. Investment property

Question 4

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?

a. Interest is being incurred.

b. Expenditures for the asset have been made.

c. The interest rate is equal to or greater than the cost of capital.

d. Activities necessary to get the asset ready for the intended use are in progress.

Answer 4

c. The interest rate is equal to or greater than the cost of capital.

Question 5

If the qualifying asset is financed by general borrowing, the capitalizable borrowing cost is equal to

a. Actual borrowing cost incurred

b. Total expenditures on the asset multiplied by a capitalization rate

c. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred, whichever is lower

d. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred, whichever is higher

Answer 5

c. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred, whichever is lower

Question 6

Capitalization of borrowing cost

a. Shall be suspended during temporary period of delay.

b. May be suspended only during extended period of delay in which active development is delayed.

c. Shall never be suspended.

d. Shall be suspended only during extended period of delay in which active development is delayed.

Answer 6

d. Shall be suspended only during extended period of delay in which active development is delayed.

Question 7

The period of time during which interest must be capitalized ends when

a. The asset is substantially complete and ready for the intended use.

b. No further interest is being incurred.

c. The asset is abandoned, sold or fully depreciated.

d. The activities that are necessary to get the asset ready for the intended use have begun.

Answer 7

a. The asset is substantially complete and ready for the intended use.

Question 8

Which is not a disclosure requirement in relation to borrowing cost?

a. Accounting policy adopted for borrowing cost

b. Amount of borrowing cost capitalized during the period

c. Segregation of qualifying asset from other assets

d. Capitalization rate used to determine the amount of borrowing cost eligible for capitalization

Answer 8

c. Segregation of qualifying asset from other assets

Question 9

Which is not be considered a qualifying asset?

a. A power generation plant that normally takes two years to construct.

b. An expensive private jet that can be purchased freom a local manufacturer.

c. A toll bridge that usually takes more than a year to build

d. A ship that normally takes one to two years to complete.

Answer 9

b. An expensive private jet that can be purchased freom a local manufacturer.

Question 10

Assets that qualify for interest capitalization include

a. Asset under construction for an entity’s use.

b. Asset that is ready for the intended use.

c. Asset that is not currently being used.

d. All of these assets qualify for interest capitalization.

Answer 10

a. Asset under construction for an entity’s use.

Question 11

Which of the following cost may not be elgible for capitalization as borrowing cost?

a. Interest on bonds issued to finance construction.

b. Amortization of discount or premium relating to borrowings that qualify for capitalization.

c. Imputed cost of equity.

d. Exchange difference arising from foreign currency borrowing regarded as an adjustment to interest cost pertaining to a qualifying asset.

Answer 11

c. Imputed cost of equity.

Question 12

An entity can commence capitalization of borrowing cost on a new construction project when

a. Loan interest relating to the project starts to be incurred.

b. Technical site planning commences.

c. Expenditures on the project start to be incurred.

d. Construction work commences.

Answer 12

c. Expenditures on the project start to be incurred.

Question 13

Interest revenue earned on specific borrowing for qualifying asset

a. Reduces the cost of the qualifying asset.

b. Reduces interest expense in the income statement.

c. Increases equity.

d. Must be credited to interest income.

Answer 13

a. Reduces the cost of the qualifying asset.

Question 14

Borrowing costs are defined as

a. Interest expense using the effective interest method.
b. Finance charges in respect of finance lease.
c. Exchange differences arising from foreign currency borrowings to the extent that these are regarded as an adjustment to interest cost.
d. Interest and other costs that an entity incurs in connection with borrowing of funds.

Answer 14

d. Interest and other costs that an entity incurs in connection with borrowing of funds.

Question 15

Which statement is true concerning capitalization of borrowing cost?
I. If the borrowing is directly attributable to a qualifying asset, the borrowing cost is required to be capitalized as cost of the asset.
II. If the borrowing is not directly attributable to a qualifying asset, the borrowing cost shall be expensed as incurred.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer 15

c. Both I and II

Question 16

Which statement about the capitalization of borrowing cost as part of the cost of a qualifying asset is true?

a. If funds come from general borrowings, the amount to be capitalized is based on the weighted average amount of expenditures.

b. Capitalization always continues until the asset is brought into use.

c. Capitalization always commences as soon as expenditure of the asset is incurred.

d. Capitalization always commences as soon as interest on relevant borrowings is being incurred.

Answer 16

a. If funds come from general borrowings, the amount to be capitalized is based on the weighted average amount of expenditures.

Question 17

Which is the correct approach in accounting for interest incurred in financing specifically the construction of property, plant and equipment?

a. Capitalize only the actual interest incurred during construction.

b. Charge construction with all costs of funds employed.

c. Capitalize no interest during construction.

d. Capitalize interest equal to the prime interest rate times the estimated cost of the asset being constructed.

Answer 17

a. Capitalize only the actual interest incurred during construction.

Question 18

When computing the amount of interest cost to be capitalized, the concept of avoidable interest refers to

a. The total interest cost actually incurred.

b. A cost of capital.

c. That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.

d. That portion of average accumulated expenditures on which no interest cost was incurred.

Answer 18

c. That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.