Question

SCENARIO TWO

Musonda Plc acquired an incomplete building from Veekay Limited on 31 December 2018 at a total cost of K200,000. On 1 January 2019 construction works on the building commenced. Musonda Plc has estimated that the building will take 15 months to be ready for use. Musonda Plc wants to sell the building immediately it is ready for use.

The constructions works are expected to cost Musonda Plc K120,000. This will be financed by Musonda Plc’s existing loans’ outlay. Musonda Plc has three (3) existing loans as shown below:

Amount                      Interest rate               Date borrowed          Loan duration

Loan 1 K150,000                   20%                             1 October 2015           5 years

Loan 2             K250,000                   12%                             1 October 2016           8 years

Loan 3             K300,000                   10%                             1 October 2017    10 years

Musonda Plc has already used K400,000 of the loans on other construction projects which are still on–going. All the loans have a fixed annual interest and principal amounts are repayable at the end of each loan period.

In the year to 30 September 2019, Musonda Plc spent K60,000 on the construction works of the building acquired from Veekay Limited. Total interest for the year to 30 September 2019 was fully paid on 30 September 2019.

The directors of Musonda Plc are not sure of how to treat the building and interest on loans in their financial statements for the year to 30 September 2019.         

Required:

Explain how the transactions would be treated in the financial statements of Musonda Plc. for the year ended 30 September 2019.                                                                     (8 marks)

Answer 1

For the above case first and second loan already used as per information given in the problem

Already loan used money was K 400,000 ( first loan Was 1,50,000 and Second loan was 2,50,000 )

we need consider the 3rd loan used for construction of building Veekay Limited.

Building cost In the financial statement as of 30th Sep 2019:

Incomplete building cost K 200,000 ( assuming principal cost not taken financing)

Add: Cost spent up to 30th Sep 2019 K 60,000

Interest on K 60,000 up to 30th Sep 2019 K 4,500 (6000*10%)/12 * 9))

Total cost as of 30th Sep 2019 K 2,64,500