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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sundaram Textiles Ltd. took a specific term loan of Rs 2,00,00,000 at 10% p.a. on 1 April 2025 to construct a new weaving unit, which is a qualifying asset. Construction began immediately and continued through the year. Pending utilisation, Rs 40,00,000 of the loan was temporarily invested from 1 April 2025 to 30 June 2025 (3 months) and earned interest income of Rs 1,00,000. What amount of borrowing cost is eligible for capitalisation for the year ended 31 March 2026?

The eligible amount is Rs 19,00,000. For a specific loan on a qualifying asset, AS 16 allows capitalisation of actual interest of Rs 20,00,000 less the Rs 1,00,000 earned on temporary investment of unused loan funds, so the net capitalised cost is Rs 19,00,000.

  1. ARs 20,00,000
  2. BRs 19,00,000Correct
  3. CRs 21,00,000
  4. DRs 16,00,000

Explanation

For specific borrowings, borrowing costs eligible for capitalisation are actual costs incurred less income earned on temporary investment of the unutilised funds. Interest = 2,00,00,000 x 10% = Rs 20,00,000. Less investment income Rs 1,00,000 gives Rs 19,00,000. Rs 20,00,000 ignores the deduction of investment income, and Rs 21,00,000 wrongly adds it.

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