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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Malabar Shipyards Ltd. borrowed ₹1,00,00,000 at 12% p.a. on 1 April 2025 specifically to build an office complex. Construction started on 1 April 2025 and the complex was completed and ready for its intended use on 31 December 2025. The company's year ends on 31 March 2026. What amount of interest on this loan should be charged to the Statement of Profit and Loss for the year?

₹3,00,000 should be charged to profit and loss. Interest for the nine months of construction, ₹9,00,000, is capitalised, but capitalisation ceases once the asset is ready for its intended use on 31 December 2025, so the remaining three months of interest is an expense.

  1. A₹12,00,000
  2. B₹9,00,000
  3. C₹3,00,000Correct
  4. DNil

Explanation

Annual interest is ₹12,00,000, or ₹1,00,000 per month. Capitalisation stops when the asset is substantially ready for its intended use, so 9 months, ₹9,00,000, is capitalised. Interest for January to March 2026, ₹3,00,000, is expensed. Charging nothing wrongly capitalises the whole year.

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