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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Konark Engineering Ltd took a term loan of Rs 10,00,00,000 at 12% p.a. on 1 April 2025 solely to build a new plant. Physical construction was completed and the plant was ready for its intended use on 31 December 2025, although minor interior finishing continued till 31 March 2026. The loan stayed outstanding for the whole year. How much interest should be capitalised to the plant for the year ended 31 March 2026 under AS 16?

Rs 90,00,000 is capitalised. Capitalisation stops once the plant is substantially ready for intended use on 31 December, ignoring minor finishing work. Nine months of interest on Rs 10 crore at 12% is Rs 90,00,000, and the last quarter's interest goes to the Statement of Profit and Loss.

  1. ARs 1,20,00,000
  2. BRs 90,00,000Correct
  3. CRs 60,00,000
  4. DRs 30,00,000

Explanation

Capitalisation ceases when substantially all activities needed to prepare the asset for its intended use are complete; minor pending work does not extend it. The period is 1 April to 31 December, which is 9 months. Interest capitalised = 10,00,00,000 x 12% x 9/12 = Rs 90,00,000. Rs 1,20,00,000 wrongly capitalises the full year, and Rs 30,00,000 is the interest for the post-completion quarter, which is expensed.

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