Answer:
1. The amount of interest expense Kit would capitalize related to the construction of the building is <u>$300,000</u>.
2. The amount of interest revenue Kit would recognize is <u>$275,000</u>.
3. The amount of interest revenue Kit would capitalized as per IFRS (IAS 23) is <u>$25,000</u>.
Explanation:
1. Compute the amount of interest expense Kit would capitalize related to the construction of the building.$
Note: See part 1 of the attached excel file for the calculation of average expenses incurred for the building
Average expenses incurred for the building = $2,500,000
Interest rate = 12%
Interest expense to capitalize = $2,500,000 * 12% = $300,000
Therefore, the amount of interest expense Kit would capitalize related to the construction of the building is <u>$300,000</u>.
2. Compute the amount of interest revenue Kit would recognize.$
Note: See part 2 of the attached excel file for the calculation of the total interest revenue.
Amount of interest revenue = $275,000
Therefore, the amount of interest revenue Kit would recognize is <u>$275,000</u>.
3. Assume that Kit uses IFRS. What amount of interest would be capitalized related to the construction of the building?$
The IAS 23 Clause 12 states that to the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.
Based on the above, the amount of interest that would be capitalized related to the construction of the building can be calculated as follows:
Amount of interest revenue to capitalized as per IFRS = Interest expense to capitalize - Total interest income = $3000,000 - $275,000 = $25,000
Therefore, the amount of interest revenue Kit would capitalized as per IFRS (IAS 23) is <u>$25,000</u>.
