Skip to content

CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sundaram Textiles Ltd. began constructing a new dyeing unit on 1 April 2025. It borrowed Rs 2,00,00,000 specifically for the project at 9% p.a. on that date. Construction took more than a year. Until the funds were spent, Rs 40,00,000 of the loan was parked in a short-term deposit for 3 months, earning Rs 90,000 of interest. For the year ended 31 March 2026, how much borrowing cost is eligible for capitalisation, assuming the asset was under construction all year?

The eligible borrowing cost is Rs 17,10,000. Interest on the specific loan is Rs 18,00,000, and AS 16 requires the income earned on temporary investment of those borrowed funds, Rs 90,000, to be deducted from the borrowing costs eligible for capitalisation.

  1. ARs 18,00,000
  2. BRs 17,10,000Correct
  3. CRs 18,90,000
  4. DRs 14,40,000

Explanation

Interest on specific borrowing = 2,00,00,000 x 9% = Rs 18,00,000. Under AS 16, income earned on temporary investment of the specific borrowing is deducted: 18,00,000 - 90,000 = Rs 17,10,000. Adding the income gives Rs 18,90,000, which is the wrong sign.

Did you get it right without looking?

One question tells you little. A timed set on AS 16 Borrowing Costs shows your real accuracy, how long you take and where you lose marks.

Practise AS 16 Borrowing CostsFree diagnostic mock

More AS 16 Borrowing Costs questions