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On 1 January 2019, 3D-Construction (Pty) Ltd obtained planning permission to build a new office building....

On 1 January 2019, 3D-Construction (Pty) Ltd obtained planning permission to build a new office building. Construction commenced on 1 March 2019. To help fund the cost of this building, a loan for $10 million was taken out from Bank Gaborone on 1 April 2019. The interest rate on the loan was 10% per annum. Construction of the building ceased during the month of July due to an unexpected shortage of labor and materials. By 31 December 2019, the building was not complete. Costs incurred to date were $24 million (excluding interest on the loan).

Required: Discuss the accounting treatment of the above in the financial statements of 3D-Construction for the year ended 31 December 2019.

Business   Accounting   
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Answer #1

Accounting treatment of the given costs are as under:

Loan of $10 Million Dollar - As loan is outstanding as on 31st Dec 2019, we will show this amount as liability.

Interest on $10 Million Dollar at 10% for 10 months - Assuming interest amount is not paid. The same will be added in Loan outstading amount as on 31st Dec 2019.

Stoppage in Construction - Since Stopage of work occuring due to unexpected shortage of labour and material, the same will not be capitalised in the books. And the cost incurred during stoppage period will be written off in Profit & Loss A/c

Cost of Construction - Contruction cost including interest expenses on loan till 31st Dec 2019 will be capitalised in the books except cost and interest expense incurred during stoppage period

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