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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Dhanush Realty Ltd took a specific term loan of Rs 5 crore at 9% p.a. on 1 April 2025 to construct a qualifying asset. Active development was suspended for four months from 1 August 2025 to 30 November 2025 because of litigation, and this interruption was not a necessary technical stage of construction. Temporary investment of unutilised loan funds earned Rs 4 lakh, all during the periods in which capitalisation was permitted. The asset was still under construction on 31 March 2026. What amount of borrowing cost is capitalised for the year?

Rs 26 lakh is capitalised. Interest for the eight active months is Rs 30 lakh, since the four-month suspension is excluded and expensed. The Rs 4 lakh earned by temporarily investing unused specific-loan funds is then deducted, giving Rs 26 lakh under AS 16.

  1. ARs 45 lakh
  2. BRs 41 lakh
  3. CRs 30 lakh
  4. DRs 26 lakhCorrect

Explanation

Annual interest = Rs 5 crore x 9% = Rs 45 lakh, or Rs 3.75 lakh per month. Capitalisation is suspended for the 4 months of extended interruption, leaving 8 months: 3.75 x 8 = Rs 30 lakh. Income from temporary investment of the specific loan is deducted: 30 - 4 = Rs 26 lakh. The remaining Rs 15 lakh of interest for the suspension period is charged to the statement of profit and loss. Rs 41 lakh ignores the suspension.

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