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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Himalaya Cement Ltd. is constructing a kiln (qualifying asset) financed by a specific loan of Rs 1,20,00,000 at 12% p.a. Active development was suspended for 3 months, from 1 July 2025 to 30 September 2025, because of a labour dispute, which is an extended period not necessary for the asset's construction. Work otherwise continued through the year ended 31 March 2026. What amount of interest should be capitalised, and what is the treatment of the rest?

Rs 10,80,000 is capitalised and Rs 3,60,000 is charged to profit and loss. AS 16 requires suspending capitalisation during extended periods when active development is interrupted, so interest for the three idle months is expensed, while interest for the other nine months of the Rs 14,40,000 annual cost is capitalised.

  1. ARs 14,40,000 capitalised; nothing expensed
  2. BRs 10,80,000 capitalised; Rs 3,60,000 charged to profit and lossCorrect
  3. CRs 10,80,000 capitalised; Rs 3,60,000 deferred as prepaid expense
  4. DRs 3,60,000 capitalised; Rs 10,80,000 charged to profit and loss

Explanation

Annual interest = 1,20,00,000 x 12% = Rs 14,40,000. Capitalisation is suspended during extended periods when active development is interrupted, so the 3 months' interest of Rs 3,60,000 is expensed. Capitalised amount is 9/12 x 14,40,000 = Rs 10,80,000.

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