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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Godavari Power Ltd has no specific borrowing for a qualifying asset but has two general borrowings outstanding all year 2025-26: ₹2 crore at 10% p.a. and ₹3 crore at 12% p.a. Expenditure on the qualifying asset was ₹1 crore on 1 April 2025 and ₹2 crore on 1 October 2025. The asset is incomplete on 31 March 2026. What borrowing cost is capitalised for the year?

₹22,40,000 is capitalised. For general borrowings, AS 16 applies the weighted average rate, here 56 lakh divided by 5 crore, or 11.2%, to the time-weighted expenditure on the asset of ₹2 crore. Using a simple average rate or unweighted expenditure gives incorrect amounts.

  1. A₹22,00,000
  2. B₹22,40,000Correct
  3. C₹33,60,000
  4. D₹56,00,000

Explanation

Weighted average rate = (20 lakh + 36 lakh) / 5 crore = 11.2%. Weighted expenditure = ₹1 crore × 12/12 + ₹2 crore × 6/12 = ₹2 crore. Capitalised = ₹2 crore × 11.2% = ₹22.4 lakh. The ₹22 lakh option uses the simple average of 10% and 12%, which is 11%, instead of the weighted rate. ₹33.6 lakh ignores time-weighting of expenditure, and ₹56 lakh is total interest.

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