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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Kaveri Textiles Ltd took a loan of USD 1,00,000 on 1 April to construct a new dyeing unit, a qualifying asset that remained under construction for the whole year. The loan carries 5% interest p.a. The rupee loan equivalent would have carried 10% interest. Rate on 1 April was ₹80 per USD and on 31 March was ₹84 per USD. Interest on the USD loan for the year, translated at the average rate, is ₹4,10,000. The loan is wholly for the dyeing unit. How much exchange loss should be charged to the Statement of Profit and Loss for the year, as per AS 16?

₹10,000 is charged to profit and loss. The exchange loss is ₹4,00,000, but AS 16 allows only the difference between interest on an equivalent rupee loan (₹8,00,000) and actual interest (₹4,10,000), i.e. ₹3,90,000, to be treated as borrowing cost. The balance of ₹10,000 is expensed.

  1. A₹3,90,000
  2. B₹4,00,000
  3. C₹10,000Correct
  4. DNil

Explanation

Exchange loss on principal = 1,00,000 × (84 − 80) = ₹4,00,000. Interest on an equivalent rupee loan = 80,00,000 × 10% = ₹8,00,000. The exchange difference treated as a borrowing cost is limited to the difference between this and the actual interest: 8,00,000 − 4,10,000 = ₹3,90,000. The remaining loss, 4,00,000 − 3,90,000 = ₹10,000, goes to the profit and loss statement. Thus ₹3,90,000 is the capitalised portion, not the amount charged.

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