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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sundaram Heavy Engineering Ltd is building a fabrication plant, a qualifying asset, financed only by general borrowings outstanding all year: a ₹50,00,000 term loan at 10% p.a. and ₹30,00,000 debentures at 12% p.a. Expenditure on the plant was ₹24,00,000 on 1 April and ₹12,00,000 on 1 October. For the year ended 31 March, active development was suspended for an extended period of two months because of a dispute with the contractor. Assuming no other interruptions, what amount of borrowing cost should be capitalised?

₹2,58,000 is capitalised. The weighted average rate is 10.75%. Capitalisation is suspended for two months, so the ₹24 lakh outlay counts for 10 months, giving ₹2,15,000, and the ₹12 lakh outlay for 4 months, giving ₹43,000. The two amounts together equal ₹2,58,000.

  1. A₹2,58,000Correct
  2. B₹3,22,500
  3. C₹2,64,000
  4. D₹8,60,000

Explanation

Capitalisation rate = (5,00,000 + 3,60,000) / 80,00,000 = 10.75%. After excluding the two-month suspension, the first outlay is financed for 10 months: 24,00,000 × 10.75% × 10/12 = ₹2,15,000. The second is financed for 6 − 2 = 4 months: 12,00,000 × 10.75% × 4/12 = ₹43,000. Total is ₹2,58,000. Ignoring the suspension gives ₹3,22,500, and using a simple average rate of 11% gives ₹2,64,000.

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