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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Konkan Textiles Ltd. began constructing a new dyeing unit on 1 April 2025. It borrowed Rs 2,00,00,000 specifically for the project at 9% p.a. Construction continued for the whole year and the asset was not ready for use at 31 March 2026. Pending utilisation, Rs 40,00,000 of the loan was temporarily invested for 3 months, earning Rs 90,000 interest. What amount of borrowing cost is capitalised for the year ended 31 March 2026?

Rs 17,10,000 is capitalised. Interest on the specific loan is Rs 18,00,000, and under AS 16 income earned on temporary investment of that specific borrowing is deducted from the eligible borrowing cost, giving 18,00,000 less 90,000.

  1. ARs 17,10,000Correct
  2. BRs 18,00,000
  3. CRs 18,90,000
  4. DRs 16,20,000

Explanation

Interest on specific borrowing = 2,00,00,000 x 9% = Rs 18,00,000. Income earned on temporary investment of the specific borrowing is deducted: 18,00,000 - 90,000 = Rs 17,10,000. Rs 18,00,000 ignores the deduction; Rs 18,90,000 wrongly adds the income.

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