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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Konkan Textiles Ltd. borrowed Rs 2,00,000 specifically for constructing a new warehouse. Construction is expected to take more than a year, and the warehouse is a qualifying asset. Interest of Rs 24,000 was paid on this loan during the year. During the first 3 months of the year, the unused portion of the loan was placed in a short-term deposit, which earned Rs 3,000 of interest. What amount of borrowing cost should be capitalised for the year as per AS 16?

The capitalised borrowing cost is Rs 21,000. Under AS 16, for funds borrowed specifically for a qualifying asset, actual interest incurred is capitalised after deducting income earned on temporary investment of unused loan funds. So Rs 24,000 less Rs 3,000 equals Rs 21,000.

  1. ARs 24,000
  2. BRs 21,000Correct
  3. CRs 27,000
  4. DRs 3,000

Explanation

For a specific borrowing, the borrowing costs eligible for capitalisation are the actual costs incurred less any income earned on temporary investment of the borrowed funds. Capitalised amount = 24,000 - 3,000 = Rs 21,000. Rs 24,000 ignores the deduction of investment income. Rs 27,000 adds the income instead of deducting it.

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