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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Meena Textiles Ltd. began constructing a new factory on 1 April 2025 using a specific loan of ₹50,00,000 at 9% p.a. Active development was suspended from 1 August 2025 to 30 November 2025 due to a labour dispute, which is not a normal part of the construction process. Construction resumed on 1 December 2025 and continued to 31 March 2026. Ignoring any investment income, what interest should be capitalised for the year and what should be charged to profit and loss?

₹3,00,000 is capitalised and ₹1,50,000 is charged to profit and loss. AS 16 requires suspension of capitalisation during extended periods when active development is interrupted, so only 8 of the 12 months of interest on ₹4,50,000 qualifies for capitalisation.

  1. ACapitalised ₹4,50,000; charged ₹0
  2. BCapitalised ₹3,00,000; charged ₹1,50,000Correct
  3. CCapitalised ₹3,75,000; charged ₹75,000
  4. DCapitalised ₹1,50,000; charged ₹3,00,000

Explanation

Total interest = 50,00,000 × 9% = ₹4,50,000. Active development was on for 4 months (April–July) plus 4 months (December–March) = 8 months, so capitalised = 4,50,000 × 8/12 = ₹3,00,000. Suspension of 4 months gives ₹1,50,000 charged to P&L, as capitalisation is suspended during extended periods of suspended active development.

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