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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sundaram Infra Ltd is considering four items for the purpose of applying AS 16 Borrowing Costs. Which one is a qualifying asset?

The factory building expected to take about 20 months is the qualifying asset. AS 16 treats an asset as qualifying only when it necessarily takes a substantial period, generally twelve months or more, to become ready for use or sale. The other items are ready for use or sale immediately.

  1. AReadymade office furniture bought and put to use within a week of purchase
  2. BTrading goods held in the showroom that are ready for sale
  3. CA new factory building whose construction is expected to take about 20 months before it can be usedCorrect
  4. DA delivery vehicle bought on instalments and handed over on the day of purchase

Explanation

AS 16 defines a qualifying asset as one that necessarily takes a substantial period of time (generally 12 months or more) to get ready for its intended use or sale. Only the factory building with a 20-month construction period meets this test. The furniture, ready stock and vehicle are ready for use or sale immediately, so their borrowing costs are expensed.

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