Reference no: EM132951486

Negril Enterprise commenced the construction of a plant on 1 January 2019 with funds borrowed from a local bank at 8% per annum. The entity borrowed $500 million to assist with construction. The loan agreement indicated that the entity should commence principal and interest payments on December 31, 2020. The entity is given ten years to repay the entire loan. The entity incurred direct material, direct labour, direct expenses and overheads of $ 300 million, $400 million, $100 million and $600 million respectively.

Of the total overheads, two-thirds relate to cost overruns by the entity's management. The plant is to be depreciated over a period of fifty years on a straight line basis to a nil residual value. Construction of the plant was completed on September 30, 2019. However, the plant was brought into operation on October 1, 2019.

The plant is to be carried under the cost model in accordance with IAS 16.

Required:

a. Determine the capitalized cost of the plant as at October 1, 2019.

b. Prepare the statement of financial position extract as at December 31, 2019.

c. Prepare the statement of profit or loss for period ended December 31, 2019.

Explain how investment income earned from borrowed funds invested during construction of an asset should be accounted for