Solomon Company constructed its own office building. The company had a 1,000,000 two-year 12% loan specifically obtained to finance the asset construction. The construction began on January 1, 2021 and the building was completed on December 31, 2021. Expenditures on the building were made as follows: • January 1, 2021 - 1,600,000 • April 30, 2021 - 600,000
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Solomon Company constructed its own office building. The company had a 1,000,000 two-year 12% loan specifically obtained to finance the asset construction. The construction began on January 1, 2021 and the building was completed on December 31, 2021. Expenditures on the building were made as follows:
• January 1, 2021 - 1,600,000
• April 30, 2021 - 600,000
• November 11, 2021 - 1,200,000
Solomon has the following outstanding general borrowings: BPI at 10% for 1,500,000 and BDO at 12% for 2,500,000.
QUESTION 1:
How much is the borrowing to be capitalized by Solomon Company?
QUESTION 2:
How much is the total finance cost for the year 2021?
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