FIN611 Assignment No 2 Solution Autumn 2021-Advance Finanical Accounting
FIN611 Assignment No 2 Solution Autumn 2021-Advance Finanical Accounting
Question: 1
XYZ Limited has planned the construction of a plant for production at another site. The construction will be required a huge amount. This may also require importing some machinery as well. The following information has been extracted from the balance sheet of XYZ Limited as on 31st December 2020
Outstanding Loans:
Loan A @ 19% p.a Rs. 1,500,000
Loan B @ 15% p.a Rs. 3,500,000
Loan C @ 21% p.a Rs. 2,500,000
Loan A and Loan C were taken at the start of the financial Year 2020, the Loan B was taken on March 31st, 2020. The import duty of Rs. 100,000 also paid after deducting the government subsidy given of Rs.100,000 on import duty. Other than these expenses, XYZ Company Limited has incurred the following expenditure during the year on the plant under construction:
February 01, 2020 500,000
April 30,2020 700,000
September 30, 2020 1,300,000
Required
Determine the capitalization rate and total cost be capitalized on the construction of the plant
till the date.
Question: 1
XYZ Limited has planned the construction of a plant for production at another site. The construction will be required a huge amount. This may also require importing some machinery as well. The following information has been extracted from the balance sheet of XYZ Limited as on 31st December 2020
Outstanding Loans:
Loan A @ 19% p.a Rs. 1,500,000
Loan B @ 15% p.a Rs. 3,500,000
Loan C @ 21% p.a Rs. 2,500,000
Loan A and Loan C were taken at the start of the financial Year 2020, the Loan B was taken on March 31st, 2020. The import duty of Rs. 100,000 also paid after deducting the government subsidy given of Rs.100,000 on import duty. Other than these expenses, XYZ Company Limited has incurred the following expenditure during the year on the plant under construction:
February 01, 2020 500,000
April 30,2020 700,000
September 30, 2020 1,300,000
Required
Determine the capitalization rate and total cost be capitalized on the construction of the plant
till the date.
Transcript
00:00bismillahirrahmanirrahim assalamualaikum dear students and viewers welcome to my youtube
00:05channel tp learner points today we are going to cover the session of the assignment number
00:15two of the subject advanced financial accounting page 6.1 in this video so its last date is
00:2422nd february 2022 and it has total mark equal to 10 it has only one sorry for interruption
00:35by my dog so he is in very excitement i don't know why so let's come back to our question
00:46the xyz limited plan the construction of plant for production at another site the construction
00:55will be required a huge amount this may also require to import some machinery as well the
01:01following information has been extracted from the balance sheet of xyz limited as on 35
01:07december 2020 the question is that there is a company whose name is xyz limited he interested
01:14to construct a plant for its production purposes and at that site it means it has already some
01:22production plant but he is interested to construct that plant on another site so for this he was
01:33required a very large amount of rupees further this may also require some machine that is
01:44that will be imported from the other country so he question inform us that he extracted some
01:55information regarding loans from the balance sheet of xyz limited company and the information
02:02about the loans are here loans a has been taken at 19 percent per annum and his amount is 1.5
02:12million the second loan b is taken at 5 15 percent per annum and his amount is 3.5 million
02:18and lastly the loan c is taken at 21 5 percent per annum and this amount is rupees 2.5 million
02:28there's a further information about the loans loan a and loan c was taken at the start of the
02:34construction year it means may be first back in january and there as a loan b was taken on march
02:4131st 2020 the import duty of rupees 100 000 also paid after deducting the government subsidy given
02:51of rupees 100 000 on import duty and so there's a little bit more information about this plan that
03:01uh the entity paid import duty of rupees 100 000 that he has imported from the other countries
03:09as well as he also detected the amount 100 000 from the same time on import duty that is given
03:16by the government to the company other than these expenses as well as the company emitted
03:22has incurred the farming expenditure during the year on plan under the construction
03:28uh besides this import duty and subsidy the company engages the following expenditure that
03:37are related to the construction of this plant and so dates are very important in this case
03:43february 1 2020 500 000 april 30 2020 700 000 september 30 2020 1.3 million
03:56uh required to determine the capitalization and total cost to be capitalized on consumption of
04:01the plant till the date now we are two tasks in front of us one to find out the capitalization
04:08rate and the total cost that is going to be capitalized related to the consumption of the
04:13plant so i request you read all these important uh important points and
04:18information available on this page of your assignment for your better understanding
04:26so let's move to the solution i have done this solution on excel so let's start the solutions
04:34step by step in first table i have two portion first portion is let's do the information given
04:42and the portion after the in this yellow line is calculate calculation based so first column
04:51of this table tells you about the date of the loans and the second is loan type abc and the
04:58amount of the loan and the column rate is about the rate of interest related to the each loan types
05:07and in rupees so this is the column that we are going to be
05:17calculated and this is the amount that is related to the
05:23debt accounting period so we are going to be calculated uh on the basis of
05:31the number of months that we have used as per each loan in the prevailing accounting period
05:38which started from 2020 january 2020 to 31st december 2020 so how we calculated this
05:46see for this generally whole 12 month has been used for this we use nine month and for this we
05:54use 12 months again so what we did we multiply every month by the expected use of months and
06:02divided by the base number of months which is which are equal to 12 so look at this in this
06:11case 12 by 12 so all amount is come under this cell second one is as this is march means first
06:21so how many months we will consider in this case nine months nine by twelve two point six
06:28two five million and similarly the same amount is appeared in this cell because again
06:36it is used for 12 months period so now we are going to calculate the interest amount
06:45in respect of each loan type based on this rate so 285 it is obtained by multiplying 0.19 percent
06:55with this 1.5 million so we will get this amount 285 which is also a borrowing cost per loan
07:03a so on the same way i have calculated that two borrowing cost
07:09uh in respective of the other two loan types p and c so get the total of these two columns
07:19to find out the capitalization rate in next step i am going to find the capital rate
07:29so it is equal to the total interest amount or borrowing cost divided by weighted average
07:35loan this this column into 100 so 0.19 0.19 percent rate we have obtained which is called
07:44capitalization rate so total interest see here h8 h8 divided by g8 into 100 now this is a very
07:54important uh slide so borrowing cost reserve of capitalization and that we are going to be
08:02calculated
08:07until now we have calculated all information regarding the loans now we are going to
08:15to take up the portion which are related to the construction of the plant and the amount which
08:21has incurred as a cost is taken out from these amounts so that's why we are going to apply this
08:31rate which is known as capitalization rate in determining the portion of the
08:40borrowing cost that is eligible for capitalization so here is a capital expenditure that already
08:46incurred in connection with the construction of the plant 500,000 700,000 and 1.3 million
08:52so these are capitalization and again i period is very important this is used for 11 month and
09:02used for nine month and this is used for one month so capitalization amount will be obtained
09:11as by multiplying related to the borrowing cost because we need absolute terms all these
09:19are incurred but we are going to trying to find the portion of the borrowing cost that is related
09:28to this construction of the plant and become the part of the total cost that could that is to that
09:37to be capitalized so multiplying 500,000 with 0.19 and 0.92 look at this so we will get this
09:47amount 87,083.33 under the column capitalization and on the same line we find out the rest of the
09:54two and this is the total of this column capitalization so now capital expenditure this
10:02is a capital expenditure 2.5 million that we have already incurred and this is the borrowing cost
10:08eligible for capitalization this is which is calculated on the base of capitalization rate
10:15so why we calculated this because it is related with the borrowing cost
10:19so this is the amount that we have deducted from the borrowing cost to make it part of the total
10:24cost total cost of the plant or the accounting period and that is will be capitalized so borrowing
10:33cost eligible for capitalization 207416.67 this one come here import which is the part of because
10:42if we don't avail this machine we cannot we cannot complete our production we cannot get
10:49our future benefits for the entity so total cost is equal to 2.8 million yes formula is correct
10:57so again government has given subsidy so we detect this subsidy and net total cost is 2.7 million
11:05now we are interested to find out the portion of the borrowing cost that is charge at expense
11:12and become the part of the income statement so what is this this is total borrowing cost
11:23total borrowing cost minus this is capitalization so this is the amount of borrowing cost 1.051
11:35something more million dot million which is charge at the expense and become the part of the
11:42income statement i hope you enjoy this solution if you have any query please come come up in the
11:49comment section or otherwise you want to share your own opinion or suggestions or make contribution
11:55about your knowledge and comment section is in front of you and it is open for our discussion
12:02all type of discussion between us that become the reason of increase our knowledge
12:07thanks for watching