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CMA Intermediate · Financial Accounting · Borrowing Costs (AS 16)

During the year, Anand Realty Ltd incurred total borrowing costs of Rs 40,00,000, of which Rs 15,00,000 qualified for capitalisation on a building under construction. Besides disclosing its accounting policy for borrowing costs, what should it disclose as capitalised, and what amount is the interest expense recognised in the statement of profit and loss?

The company should disclose Rs 15,00,000 as borrowing costs capitalised and recognise Rs 25,00,000 as interest expense in the statement of profit and loss. Only the eligible amount is capitalised, and the remaining borrowing cost of the period is charged as an expense.

  1. ACapitalised Rs 40,00,000; interest expense Nil
  2. BCapitalised Rs 15,00,000; interest expense Rs 55,00,000
  3. CCapitalised Rs 15,00,000; interest expense Rs 25,00,000Correct
  4. DCapitalised Rs 25,00,000; interest expense Rs 15,00,000

Explanation

Only the eligible Rs 15,00,000 is capitalised and disclosed. Borrowing costs not capitalised are recognised as an expense in the period, so 40,00,000 − 15,00,000 = Rs 25,00,000. Adding the capitalised amount to the total (Rs 55,00,000) double counts, and reversing the figures confuses the two amounts.

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