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solution

On 1 January 2009, XYZ Limited (XYZ) borrowed $800 million to finance the construction work on a property, which was expected to take 2 years to build. Construction work on this qualifying asset was commenced on 1 January 2009.

XYZ drew down the loan facilities in the amounts of $800 million on 1 January 2009. Funds used for expenditures on the construction of the property were as follows:

Interest on the loan was fixed at 10% per annum. Unutilised funds were temporarily invested with a return of 6% per annum.

Required:

Assuming XYZ adopts the “to the extent” approach of asset expenditure commencement, determine the borrowing costs eligible for capitalisation for the year ended 31 December 2009 and consequently the cost of the property at 31 December 2009. Prepare the journal entry to account for the borrowing costs.

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