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(i) Discuss the arguments in favour of, and those against, the capitalization of borrowing costs as part of the cost of an asset.
On 1 April 20X2, Webster commenced the construction of a large development consisting of several separate retail premises. It had a policy of capitalizing borrowing costs under IAS 23. At 31 March 20X3 the amount of expenditure on the development totalled $12 million. These expenditures can be taken to have been incurred evenly throughout the year. The development is being financed from funds generally borrowed for the construction of similar development projects. Webster's cost of capital on these funds can be calculated from the following:
$2 million overdraft at 15 per cent per annum
$3 million 5 year secured 8 per cent loan note
$5 million 5 year unsecured 10 per cent loan note
Construction of the development was halted twice during the accounting period to 31 March 20X3. The first occasion, for a two-week period, was due to the discovery of ancient artefacts unearthed during excavation work. The second, an extended period of two months, was due to an industrial relations dispute.
(ii) Calculate the amount of finance costs that Webster should capitalize for the period to 31 March 20X3.