Goodfood is a supermarket chain. During the current year it started building a new store....
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Accounting
Goodfood is a supermarket chain. During the current year it started building a new store. The directors are aware that in accordance with IAS23 Borrowing costs certain borrowing costs have to be capitalised.
Details relating to the construction of Goodfoods new store:
Goodfood took out a 10 million loan with an interest rate of 7.5% per annum on 1 April 2017. The loan was specifically taken to finance the building of the new store which meets the definition of a qualifying asset in IAS23. Construction of the store started on 1 May 2017 and it was completed and ready for use on 28 February 2018.
Question:
Rather than take out a loan specifically for the new store Goodfood could have funded the store from existing borrowings which are:
10% bank loan of 50 million
8% bank loan of 30 million
In this case it would have applied a capitalisation rate to the expenditure on the asset. What would that rate have been?
9.25%
10%
8.75%
9%
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