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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sahyadri Infra Ltd. started constructing a bridge, a qualifying asset, on 1 April 2025 using a specific loan of Rs 1,20,00,000 at 10% p.a. Active development was suspended from 1 August 2025 to 30 November 2025 because of a prolonged dispute with the contractor over a design issue, which is not a necessary part of the normal construction process. Work resumed on 1 December 2025 and continued until 31 March 2026. Assume no other income on the loan funds. What amount of interest should be capitalised for the year ended 31 March 2026?

The amount to be capitalised is Rs 8,00,000. AS 16 requires capitalisation to be suspended during extended periods when active development is interrupted. Interest is Rs 1,00,000 per month, the four-month suspension is excluded, so eight months are capitalised, and the Rs 4,00,000 for the suspension is expensed.

  1. ARs 12,00,000
  2. BRs 8,00,000Correct
  3. CRs 4,00,000
  4. DRs 10,00,000

Explanation

Capitalisation must be suspended during extended periods when active development is interrupted, unless the delay is a necessary part of the process. Annual interest = 12,00,000, i.e. Rs 1,00,000 per month. The suspension covers 4 months (August to November), so the capitalised amount covers 8 months = Rs 8,00,000. Rs 12,00,000 ignores the suspension, and the remaining Rs 4,00,000 is charged to profit and loss.

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