Final answer:
The capitalized borrowing costs at year-end will include the interest accrued on a P720,000 note from March to June and a full year's interest on a P1,500,000 note, taking into account the completion date of the construction and relevant accounting standards for capitalization.The correct option is c. 90,000.
Step-by-step explanation:
The problem is asking us to calculate the capitalized borrowing costs at year-end for the debts incurred due to construction and other purposes. Capitalization of borrowing costs is an accounting practice that allows an entity to add interest and other financing costs to the cost of a constructed asset rather than expensing these costs as they are incurred, considering the conditions mentioned in the relevant accounting standards.
Here's how we calculate the capitalized borrowing cost:
- First, compute the interest on each note payable. For the P720,000 note payable, since this was borrowed on March 1, 2023, and the office was ready by July 1, 2023, we will calculate the interest only for four months:
(P720,000 * 9% * 4/12 months). - Next, the P1,500,000 note payable would incur a full year's interest since it was dated from January 1, 2023: (P1,500,000 * 12%).
- Add the results of step 1 and step 2 to find the total interest for the year.
- Since the office was ready for occupancy on July 1, any interest incurred after this date should not be capitalized. Therefore, only the interest up until June 30, 2023, should be included in the capitalized cost.
Therefore, the borrowing costs that should be capitalized are only those accrued until the construction was completed (from March to June for the construction loan).The correct option is c. 90,000.