Aftab Company limitedrealized itself as a social responsible company and decidedto construct an employeeshousing society for its employees working in the company,which was destroyed by anearth quake few years ago in the region. It was estimatedby construction expertsthat this project would take three years to complete and capital needed for theconstruction would not be less then Rs. 3 million. For the purposeof safety, the Aftablimited borrowed Rs. 3.4 million from different sources and used the extra 0.4 million forthe purpose of working capital needs.
Aftab Company Limitedborrowed the loans as the followings:
- Loan from AmericanBank: Rs. 1 million at 7% per annum
- Loan from MCB: Rs. 1.5million at 6% per annum
- Loan from Mezaan Bank:0.9 million at 8% per annum
At the initial stageof the project, there were idle funds of Rs. 1 million which the Aftab Limited invested for aperiod of nine months. The income from this investment was Rs. 60,000.
If the Aftab limitedadopted Allowed alternative treatment then:
1. How the Aftab Company Limited would it treat the borrowing costs.
2. How would it capitalize the borrowing cost?
3. What would be the treatment of the investment income?