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QUESTION (ICAP E S2004 Q2)
Omega Limited has been engaged in construction business and wins a contract to construct a
flyover at “cost plus 10%” with a completion period of one year. The company and the customer
agree that the element of borrowing cost in the total cost will be determined according to IAS 23.

The customer agrees to make progressive payments of Rs. 20 million each on the first day of
fourth and seventh months and the balance on completion of the project.

The management estimates cost of the flyover at Rs. 90 million. The company’s bankers agree
to finance the project @ 10% mark-up per annum and disbursement thereof will be made in
installments of Rs. 30 million each on the first day of first, fourth and seventh month.

The company realizes at the end of third month that second installment of disbursement by the
bankers need to be paid to the company’s creditors a month later. Therefore, on receipt of
second installment, it is temporarily invested to fetch return of 2% to the company. All
disbursements made are expensed out as costs.

Required:
Compute total costs of the flyover as per agreement between the company and the customer at
the time of completion of the project.
                                                                                      (15)




                      IAS 23 – ICAP E PPQnA – Kashif Adeel/www.sikaca.com
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ANSWER (ICAP E S2004 Q2)
                                                                                   $
Flyover cost of construction                                                   90,000,000
Borrowing costs capitalized W1                                                  3,650,000
Total costs                                                                    93,650,000

Working 1
                                                                              Borrowing
                                          Progress       Net
Month       Description          Loan                                 Time   costs @10%
                                          payment       Amount
                                                                                 Rs.
  1     Installment I      30,000,000                  30,000,000     3/12         750,000
  4     Installment II     30,000,000                  60,000,000
  4     Progress Payment                 20,000,000    40,000,000     3/12      1,000,000
  7     Installment III    30,000,000                  70,000,000
  7     Progress Payment                 20,000,000    50,000,000     3/12      2,500,000
12end   Progress Payment                 50,000,000             -
                                                                                4,250,000
Temporary investment income April (Rs. 30,000,000 x 2%)                         (600,000)
                                                                                3,650,000




                     IAS 23 – ICAP E PPQnA – Kashif Adeel/www.sikaca.com

								
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