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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Kaveri Infra Ltd. took a specific term loan of ₹2,00,00,000 at 10% p.a. on 1 April 2025 solely to construct a qualifying asset. Construction continued throughout the year ended 31 March 2026. Part of the loan was not yet spent and was temporarily invested, earning ₹3,50,000. What amount of borrowing cost should be capitalised for the year?

The amount to capitalise is ₹16,50,000. Interest on the specific loan is ₹20,00,000, and AS 16 requires the income earned from temporary investment of unspent specific borrowings, ₹3,50,000, to be deducted from the borrowing costs eligible for capitalisation.

  1. A₹20,00,000
  2. B₹16,50,000Correct
  3. C₹23,50,000
  4. D₹3,50,000

Explanation

Interest on the specific loan is ₹2,00,00,000 × 10% = ₹20,00,000. Income earned on temporary investment of the unspent specific borrowing is deducted: ₹20,00,000 − ₹3,50,000 = ₹16,50,000. Capitalising ₹20,00,000 ignores the income to be deducted.

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