CMA Intermediate · Financial Accounting · Borrowing Costs (AS 16)
Konark Steels took a term loan of Rs 50,00,000 at 10% p.a. specifically to build a new plant. During the year the full interest of Rs 5,00,000 was incurred. Unused funds were temporarily invested and earned Rs 60,000. What amount of borrowing cost is eligible for capitalisation on the plant for the year?
The eligible amount is Rs 4,40,000. For funds borrowed specifically for a qualifying asset, AS 16 capitalises actual borrowing cost incurred less income earned on temporary investment of those funds, so Rs 5,00,000 interest minus Rs 60,000 investment income leaves Rs 4,40,000 to capitalise.
- ARs 5,60,000
- BRs 4,40,000Correct
- CRs 5,00,000
- DRs 60,000
Explanation
For a specific borrowing, the eligible amount is actual borrowing cost less income on temporary investment of the funds. Rs 5,00,000 - Rs 60,000 = Rs 4,40,000. Adding the income (Rs 5,60,000) is a wrong sign; ignoring it gives Rs 5,00,000.
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