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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 to construct a warehouse (a qualifying asset). Construction started immediately. The company temporarily invested Rs 10,00,000 of the unused loan for 3 months and earned 6% p.a. on it. What amount of borrowing cost for the year should be capitalised, assuming construction continued for the full year?

The amount to capitalise is Rs 4,85,000. Interest on the specific loan is Rs 5,00,000, and income of Rs 15,000 earned on temporarily investing unused funds must be deducted from the borrowing cost eligible for capitalisation under AS 16.

  1. ARs 5,00,000
  2. BRs 4,85,000Correct
  3. CRs 4,70,000
  4. DRs 5,15,000

Explanation

Interest on specific loan = 50,00,000 x 10% = 5,00,000. Income on temporary investment = 10,00,000 x 6% x 3/12 = 15,000, which is deducted. Capitalised = 5,00,000 - 15,000 = 4,85,000. Rs 5,00,000 ignores the investment income; Rs 5,15,000 wrongly adds it.

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