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CA Final · Financial Reporting · Ind AS 23 Borrowing Costs

Kaveri Ltd constructs a plant using general borrowings only, with no specific loan. Its borrowings during the year were: Loan A Rs 20 crore at 10% and Loan B Rs 30 crore at 12%, both outstanding all year. Expenditure on the qualifying asset averaged Rs 15 crore for the year. Total borrowing costs are therefore interest Rs 2 crore + Rs 3.6 crore = Rs 5.6 crore. What amount is capitalised?

Rs 1.68 crore is capitalised. The capitalisation rate is the weighted average cost of general borrowings, 5.6 crore divided by 50 crore, or 11.2%. Applying it to the average expenditure of Rs 15 crore gives Rs 1.68 crore, not a simple average rate result.

  1. ARs 1.68 croreCorrect
  2. BRs 1.65 crore
  3. CRs 1.50 crore
  4. DRs 5.60 crore

Explanation

Capitalisation rate is the weighted average of borrowing costs on general borrowings: 5.6 / 50 = 11.2%. Applied to expenditure of Rs 15 crore gives Rs 1.68 crore. Rs 1.65 crore uses a simple average of 10% and 12% (11%), a wrong base for weighting; Rs 5.6 crore capitalises all interest regardless of expenditure.

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