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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Godavari Power Ltd took a specific loan of ₹5 crore at 9% p.a. on 1 April to build a plant. Active development was interrupted for two months (January and February) because of a prolonged labour strike, an extended interruption. Capitalisation was otherwise active. Unspent loan funds were temporarily invested and earned ₹2 lakh during the active development period. For the year ended 31 March, what is the borrowing cost to be capitalised?

₹35.5 lakh is capitalised. Interest for the ten active months is ₹37.5 lakh, since capitalisation is suspended during the two-month extended strike. The ₹2 lakh earned on temporary investment of the unspent specific loan is then deducted from the eligible borrowing cost.

  1. A₹35.5 lakhCorrect
  2. B₹37.5 lakh
  3. C₹43.0 lakh
  4. D₹45.0 lakh

Explanation

Annual interest is ₹45 lakh, or ₹3.75 lakh per month. Capitalisation is suspended for the 2-month extended interruption, leaving 10 months: 37.5 lakh. Income from temporary investment of the specific loan, ₹2 lakh, is deducted: 37.5 - 2 = 35.5 lakh. The ₹43 lakh option deducts the income but ignores the suspension.

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