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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Anand Cement Ltd borrowed ₹60,00,000 at 10% p.a. on 1 April specifically to construct a storage terminal, a qualifying asset whose construction continued throughout the year. Of the loan, ₹20,00,000 was not needed immediately and was invested in a short-term deposit for 6 months at 6% p.a., after which it was fully spent on construction. What amount of borrowing cost can be capitalised for the year?

₹5,40,000 can be capitalised. Interest on the specific loan is ₹6,00,000, and the ₹60,000 earned on temporarily invested surplus must be deducted under AS 16. Capitalising the full interest would ignore this income, and adding the income would reverse its required treatment.

  1. A₹6,00,000
  2. B₹5,40,000Correct
  3. C₹6,60,000
  4. D₹5,00,000

Explanation

Interest on the specific borrowing = 60,00,000 × 10% = ₹6,00,000. Income from temporary investment = 20,00,000 × 6% × 6/12 = ₹60,000. AS 16 requires this income to be deducted from borrowing costs eligible for capitalisation, giving ₹5,40,000. Capitalising ₹6,00,000 ignores the deduction, and ₹6,60,000 wrongly adds the income.

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