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solution

On 1 January 2009, Lau Limited (Lau) borrowed $200 million to finance the construction of a property, which was expected to take 2 years to build. Construction work on this qualifying asset was commenced on 1 January 2009.

Lau drew down the loan facilities in three parts in the amounts of $60 million, $80 million and $60 million on 1 January 2009, 1 April 2009 and 1 July 2009 respectively. Funds used for expenditures on the construction of the property were as follows:

Interest on the loan was fixed at 8% per annum. The unutilised funds were temporarily invested with a return of 4% per annum.

Required:

1. Determine the borrowing costs eligible for capitalisation for the year ended 31 December 2009 and consequently the cost of the property as at 31 December 2009. Prepare the journal entry to account for the borrowing costs capitalised in 2009.

2. Will your answer in (1) be different if Lau draws down the loan facilities of $200 million on 1 January 2009 instead of in three parts during 2009? Particularly, what will be the borrowing costs eligible for capitalisation for the year ended 31 December 2009 and consequently the cost of the property as at 31 December 2009? Prepare the journal entry to account for the borrowing costs capitalised in 2009.

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