CA Final · Financial Reporting · Ind AS 23 Borrowing Costs
Narmada Builders Ltd has two general borrowings outstanding all year: ₹20 crore at 10% p.a. and ₹30 crore at 12% p.a. It spent ₹6 crore on a qualifying asset from the start of the year, funded from these general borrowings, and no specific borrowing exists. What borrowing cost should be capitalised for the year?
₹67.2 lakh is capitalised. The capitalisation rate on general borrowings is the weighted average cost, total interest of ₹5.6 crore divided by total borrowings of ₹50 crore, which is 11.2%. Applying it to the ₹6 crore expenditure gives ₹67.2 lakh, not a simple average rate.
- A₹66.0 lakh
- B₹67.2 lakhCorrect
- C₹72.0 lakh
- D₹60.0 lakh
Explanation
The capitalisation rate is the weighted average of general borrowing costs: (2 crore + 3.6 crore) / 50 crore = 11.2%. Capitalised cost = 6 crore × 11.2% = ₹67.2 lakh. A simple average of 10% and 12% gives 11%, i.e. ₹66 lakh, which is wrong because it ignores the loan weights.
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