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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Ganga Power Ltd. is constructing a plant (qualifying asset) funded by a specific loan of Rs 80,00,000 at 10% p.a. Construction began on 1 April. Because of a labour strike, active development was suspended from 1 July to 30 September (extended period, not a necessary part of the process). Work resumed on 1 October and continued until 31 March. Further, from 1 January to 31 January a monsoon-related delay was a necessary part of the process in that location. What borrowing cost is capitalised for the year, and what is charged to profit and loss?

This option set contains an error in the key; the correct computation gives capitalised Rs 6,00,000 and charged Rs 2,00,000, since only the three-month strike suspension is expensed and the necessary monsoon delay stays capitalised.

  1. ACapitalised Rs 8,00,000; charged Rs nil
  2. BCapitalised Rs 5,33,333 ; charged Rs 2,66,667
  3. CCapitalised Rs 6,00,000; charged Rs 2,00,000
  4. DCapitalised Rs 6,66,667; charged Rs 1,33,333Correct

Explanation

Annual interest = 8,00,000, i.e. 66,667 per month. The strike suspension of 3 months (July-September) is extended, so Rs 2,00,000 is expensed. The January delay is a necessary part of the process, so it continues to be capitalised. Capitalised = 9 months x 66,667 = 6,00,000 plus... recheck: 12 months less 3 = 9 months = 6,00,000.

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