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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Nilgiri Power Ltd. is constructing a substation (qualifying asset) from 1 April 2025. It took a specific loan of Rs 1,00,00,000 at 8% p.a. on 1 April 2025. Expenditure on the asset: Rs 60,00,000 on 1 April 2025 and Rs 90,00,000 on 1 October 2025. The balance of the specific loan stayed in a bank account earning no income. General borrowings of Rs 2,00,00,000 at 11% p.a. were outstanding all year. Asset not ready at 31 March 2026. What total borrowing cost is capitalised for 2025-26?

Under AS 16, the specific loan interest of Rs 8,00,000 is capitalised, and expenditure beyond that loan is funded by general borrowings at 11%. Rs 50,00,000 for six months adds Rs 2,75,000, so the total is Rs 10,75,000.

  1. ARs 10,25,000Correct
  2. BRs 11,00,000
  3. CRs 10,00,000
  4. DRs 8,00,000

Explanation

Specific loan interest = 1,00,00,000 x 8% = Rs 8,00,000 (fully capitalised). The expenditure beyond the specific loan: on 1 October, expenditure cumulative is 1,50,00,000 against the loan of 1,00,00,000, so excess is 50,00,000 funded from general borrowings. Interest = 50,00,000 x 11% x 6/12 = Rs 2,75,000. Total = 8,00,000 + 2,75,000 = Rs 10,75,000.

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