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CMA Intermediate · Financial Accounting · Borrowing Costs (AS 16)

Kaveri Textiles Ltd had two general-purpose loans outstanding all year, neither taken specifically for any asset: Rs 4,00,00,000 at 12% and Rs 6,00,00,000 at 10%. The weighted average expenditure on a qualifying asset during the year was Rs 1,50,00,000, financed from general funds. What amount of capitalised borrowing costs will be disclosed?

Rs 16,20,000 is disclosed. The capitalisation rate is the weighted average of the general borrowings: Rs 1,08,00,000 interest on Rs 10,00,00,000, or 10.8%. Applying it to Rs 1,50,00,000 of expenditure gives Rs 16,20,000, within total interest incurred.

  1. ARs 16,50,000
  2. BRs 16,20,000Correct
  3. CRs 18,00,000
  4. DRs 15,00,000

Explanation

Total interest is 48,00,000 + 60,00,000 = Rs 1,08,00,000 on Rs 10,00,00,000, giving a capitalisation rate of 10.8%. Applied to expenditure of Rs 1,50,00,000 this gives Rs 16,20,000, which is below total interest incurred. A simple average of 11% gives Rs 16,50,000, which is the wrong method because it ignores the loan amounts.

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