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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Kaveri Infra Ltd. took a specific loan of Rs 50,00,000 at 10% p.a. on 1 April 2025 to construct a plant. The loan was fully drawn on that date. Construction began immediately and was completed on 31 March 2026. Out of the loan, Rs 10,00,000 was temporarily invested from 1 April 2025 to 30 September 2025 and earned Rs 20,000 as interest income. What amount of borrowing cost is to be capitalised for the year?

The capitalised amount is Rs 4,80,000. Interest on the specific loan is Rs 5,00,000 (50 lakh at 10%), and income of Rs 20,000 earned by temporarily investing part of it is deducted, as AS 16 requires for specific borrowings.

  1. ARs 5,00,000
  2. BRs 4,80,000Correct
  3. CRs 4,00,000
  4. DRs 5,20,000

Explanation

Interest on the specific loan = 50,00,000 x 10% = Rs 5,00,000. Income earned on temporary investment of the specific borrowings, Rs 20,000, is deducted. Capitalisation = 5,00,000 - 20,000 = Rs 4,80,000. Rs 5,00,000 ignores the investment income, and Rs 5,20,000 wrongly adds it.

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