Questions and Answers
What is the total current borrowing amount used for funding the house?
How much is the interest cost for the 10% loan financing?
Which interest rate applies to the larger portion of the current borrowings?
What will be the total borrowing costs that should be capitalized for the time the house is being built?
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If the house construction takes 8 months, what would be the interest cost on the 6% loan financed amount during that period?
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Study Notes
Borrowing Costs for House Construction
- Total funds required for construction: 100,000
- Construction duration: 8 months
- Current borrowings include:
- 1 million loan at 10% interest rate
- 2 million loan at 6% interest rate
Interest Calculation
- Monthly interest on 10% loan:
- Annual interest expense = 1,000,000 * 10% = 100,000
- Monthly interest = 100,000 / 12 = 8,333.33
- Monthly interest on 6% loan:
- Annual interest expense = 2,000,000 * 6% = 120,000
- Monthly interest = 120,000 / 12 = 10,000
Total Interest Cost Allocation
- Total monthly interest cost from both loans:
- 8,333.33 + 10,000 = 18,333.33
- Interest to capitalize over 8 months:
- Total interest for 8 months = 18,333.33 * 8 = 146,666.67
Interest Capitalization
- Capitalized borrowing costs must relate directly to expenditures that provide benefit to the construction of the house.
- Interest costs from both borrowings eligible for capitalization as they are incurred during construction period.
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Description
This quiz explores the treatment of borrowing costs associated with the construction of a house. It focuses on how to capitalize borrowing costs based on current loans and their interest rates. Test your knowledge on financial principles related to capitalizing costs in construction projects.
