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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Surya Steels Ltd. took a specific term loan of ₹4,00,000 at 12% p.a. on 1 April 2025 to construct a warehouse. Construction was in progress throughout the year. The company temporarily invested ₹1,00,000 of the unutilised loan for the first 3 months and earned interest of ₹2,500 on it. What borrowing cost should be capitalised for the year ended 31 March 2026?

The capitalisable amount is ₹45,500. Interest on the specific loan is ₹48,000 (₹4,00,000 at 12%), and the ₹2,500 earned from temporarily investing unutilised funds must be deducted under AS 16, since it offsets the borrowing cost eligible for capitalisation.

  1. A₹48,000
  2. B₹45,500Correct
  3. C₹50,500
  4. D₹44,000

Explanation

Interest on the loan for the year = 4,00,000 × 12% = ₹48,000. Income from temporary investment of specific borrowings pending utilisation is deducted: 48,000 − 2,500 = ₹45,500. Capitalising ₹48,000 ignores the deduction, and adding the income gives ₹50,500.

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