CMA Intermediate · Financial Accounting · Borrowing Costs (AS 16)
Sundaram Textiles Ltd borrowed Rs 80,00,000 at 10% p.a. specifically to build a new weaving unit. During the year, interest incurred on this loan was Rs 8,00,000, and unused funds were temporarily invested, earning Rs 1,20,000. What amount of borrowing cost is eligible for capitalisation on the unit as per AS 16?
The eligible amount is Rs 6,80,000. For funds borrowed specifically for a qualifying asset, AS 16 capitalises actual borrowing costs incurred less income earned on temporary investment of those borrowings: Rs 8,00,000 minus Rs 1,20,000.
- ARs 8,00,000
- BRs 9,20,000
- CRs 1,20,000
- DRs 6,80,000Correct
Explanation
For specific borrowings, eligible cost is actual borrowing cost incurred during the period less income on temporary investment of those borrowings. So 8,00,000 - 1,20,000 = Rs 6,80,000. Rs 8,00,000 ignores the investment income, and Rs 9,20,000 wrongly adds it.
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