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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Himalaya Steels Ltd borrowed ₹600 lakh at 10% p.a. on 1 April 2025 specifically to build a rolling mill, a qualifying asset. Active development was suspended for 4 months because of a court stay order, an extended interruption. During the 8 months of active development, unused portions of the loan were temporarily invested and earned ₹2 lakh. The mill was incomplete on 31 March 2026. What amount of borrowing cost should be capitalised for the year?

₹38 lakh is capitalised. Interest for the whole year is ₹60 lakh, but capitalisation stops during the extended four-month suspension, leaving ₹40 lakh for the eight active months. Income of ₹2 lakh from temporary investment of specific borrowings is deducted, giving ₹38 lakh.

  1. A₹38 lakhCorrect
  2. B₹60 lakh
  3. C₹40 lakh
  4. D₹42 lakh

Explanation

Annual interest = 600 × 10% = ₹60 lakh. Capitalisation is suspended for the 4-month stay, so interest for the 8 active months = 60 × 8/12 = ₹40 lakh. For a specific borrowing, temporary investment income of ₹2 lakh is deducted: 40 − 2 = ₹38 lakh. ₹60 lakh ignores the suspension, ₹40 lakh ignores the investment income, and ₹42 lakh wrongly adds it.

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