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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Mehta Constructions Ltd is building a bridge for its own use, a qualifying asset that remained incomplete on 31 March 2026. No specific loan was taken for it. It spent Rs 60 lakh on 1 April 2025 and Rs 48 lakh on 1 October 2025 on the bridge, funded from general borrowings. The company's general borrowings outstanding throughout the year were a Rs 2 crore loan at 10% p.a. and a Rs 1 crore loan at 13% p.a. What borrowing cost is capitalised for the year ended 31 March 2026?

Rs 9.24 lakh is capitalised. The weighted average rate on general borrowings is 11%, and the time-weighted expenditure on the bridge is Rs 84 lakh, being 60 lakh for the full year plus 48 lakh for six months. Applying 11% to Rs 84 lakh gives Rs 9.24 lakh.

  1. ARs 8.40 lakh
  2. BRs 9.24 lakhCorrect
  3. CRs 9.66 lakh
  4. DRs 11.88 lakh

Explanation

Capitalisation rate = (20 + 13) / 300 = 11% (weighted average of the borrowings). Weighted average expenditure = 60 + 48 x 6/12 = Rs 84 lakh. Borrowing cost capitalised = 84 x 11% = Rs 9.24 lakh. Rs 11.88 lakh wrongly applies the rate to the full Rs 108 lakh without time-weighting the second outlay.

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