Calculation of amount to be capitalised – specific borrowings with investment income
On 1 April 2012 a company engages in the development of a property, which is expected to take five years to complete, at a cost of CU6,000,000. In this example, a bank loan of CU6,000,000 with an effective interest rate at 6% was taken out on 31 March 2012 and fully drawn. The total interest charge for the year ended 31 December 2012 was consequently CU270,000.
However, investment income was also earned at 3% on the unapplied funds during the period as follows:
|
CU |
|
|
CU5,400,000 x 3% x 3/12 |
40,500 |
|
CU5,000,000 x 3% x 3/12 |
37,500 |
|
CU4,800,000 x 3% x 3/12 |
36,000 |
|
114,000 |
Consequently, the amount of interest to be capitalised for the year ended 31 December 2012 is:
|
CU |
|
|
Total interest charge |
270,000 |
|
Less: investment income |
(114,000) |
|
156,000 |
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