FIN611 GDB 1 Solution and Discussion

[zareen]

Total Marks 3
Starting Date Tuesday, January 21, 2020
Closing Date Monday, January 27, 2020
Status Open
Question Title GDB # 1
Question Description

A renowned cellular and telecommunication company has acquired 5G license for PKR 50 million. The company’s management has two options as under:

1.   The Company may develop 5G wireless network to expand their customer base. This project is expected to complete within 5 years. For this, the company must acquire a bank loan of PKR 100 million for a period of 5 years.
   

2.   The company has another option to further sell the 5G license to any third party.
   

Required: For each of the above option, describe the accounting treatment on capitalization of the license and the related borrowing cost under the related IASs. Journal entries are not required.

(Your answer should not be more than 100 words)

Important Instructions:

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[zareen]

@farjam-ali solution idea posted please check

[farjam ali]

fin611 gdb sol/

[zaasmi]

@zareen Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are recognised as an expense. [IAS 23.8]

[zareen]

SOLUTION:

[zareen]

IASs differentiates between capitalizing borrowing costs on general borrowings and specific borrowings.

Idea Example:
In most cases, inventories do not take a substantial period to get ready and in this case no, you cannot capitalize.

But here, there are some examples of inventories that can take a substantial period to complete:

Wine, cheese or whiskey that matures in bottle or cask for a long period of time;
Large items of equipment, such as aircraft, ships etc.

In this case, you can capitalize borrowing cost, but it’s up to you if you will or won’t.

While you have no choice for PPE (you have to capitalize), you have a choice for inventories: either you capitalize, or expense in profit or loss.

link text

[zareen]

please share idea