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CMA Intermediate · Financial Accounting · Borrowing Costs (AS 16)

Narmada Infra Ltd is constructing a qualifying asset funded from general borrowings. During the year it spent ₹50,00,000 on the asset, spread so that the weighted average expenditure for the year was ₹30,00,000. The capitalisation rate is 9%. Total borrowing costs incurred by the company during the year were ₹2,00,000. What amount may be capitalised?

Only ₹2,00,000 can be capitalised. Applying 9% to the weighted expenditure of ₹30,00,000 gives ₹2,70,000, but AS 16 states that borrowing costs capitalised in a period must not exceed the borrowing costs actually incurred in that period, which were ₹2,00,000.

  1. A₹4,50,000
  2. B₹2,70,000
  3. C₹2,00,000Correct
  4. D₹2,30,000

Explanation

Rate applied to weighted expenditure gives 30,00,000 x 9% = 2,70,000. However, the amount capitalised must not exceed the borrowing costs incurred during the period, which is 2,00,000. So capitalise 2,00,000. Using 50,00,000 x 9% gives 4,50,000, which is also above the cap.

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