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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Meenakshi Pharma Ltd. took a specific loan of Rs 1,20,00,000 at 10% p.a. on 1 April 2025 to build a plant. Its general borrowings were Rs 80,00,000 at 12% p.a. throughout the year. Plant expenditure: Rs 1,00,00,000 on 1 April 2025 and Rs 60,00,000 on 1 October 2025. The plant was under construction throughout 2025-26. What total borrowing cost is capitalised for the year?

The total capitalised is Rs 14,40,000: Rs 12,00,000 interest on the specific loan plus Rs 2,40,000 on the Rs 40,00,000 of expenditure financed from general borrowings at 12% for six months.

  1. ARs 13,20,000Correct
  2. BRs 12,00,000
  3. CRs 15,60,000
  4. DRs 14,40,000

Explanation

Specific loan interest = 1,20,00,000 x 10% = Rs 12,00,000, fully capitalised since expenditure exceeds the loan from 1 October. Expenditure beyond the specific loan: Rs 60,00,000 - 20,00,000 left on the loan... the 1 April spend of 1,00,00,000 is within the loan; the 1 October spend of 60,00,000 uses the remaining 20,00,000 of loan, so Rs 40,00,000 is funded by general borrowings. General cost = 40,00,000 x 12% x 6/12 = Rs 2,40,000. Total = 12,00,000 + 2,40,000 = Rs 14,40,000, which is option 4, not option 1.

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