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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Narmada Realty Ltd has two general borrowings outstanding all year: ₹4 crore at 10% and ₹6 crore at 12%. It uses general funds for a qualifying asset: ₹2 crore spent on 1 April and a further ₹1.2 crore spent on 1 October. The financial year ends 31 March and construction continues throughout. What borrowing cost is capitalised for the year?

₹29.12 lakh is capitalised. The weighted average rate on general borrowings is 11.2%, applied to ₹2 crore for twelve months (22.40 lakh) and ₹1.2 crore for six months (6.72 lakh). A simple average of the rates would be incorrect.

  1. A₹28.60 lakh
  2. B₹29.12 lakhCorrect
  3. C₹35.84 lakh
  4. D₹112.00 lakh

Explanation

Weighted average rate = (40 lakh + 72 lakh) / ₹10 crore = 11.2%. First outlay: 2 crore × 11.2% = 22.40 lakh. Second: 1.2 crore × 11.2% × 6/12 = 6.72 lakh. Total = 29.12 lakh. Using a simple average rate of 11% gives 28.60 lakh, which is wrong because AS 16 requires the weighted average.

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