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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Vaishnavi Infra Ltd borrowed Rs 2,00,00,000 at 10% p.a. specifically to construct a warehouse (a qualifying asset). Construction ran for the full year 1 April 2025 to 31 March 2026. Part of the loan was not needed immediately and was temporarily invested, earning Rs 3,50,000 during the year. What amount of borrowing cost is eligible for capitalisation for the year?

Rs 16,50,000 is eligible for capitalisation. Interest on the specific loan is Rs 20,00,000 for the year, and AS 16 requires the Rs 3,50,000 earned from temporarily investing unused loan funds to be deducted from the borrowing costs capitalised.

  1. ARs 23,50,000
  2. BRs 20,00,000
  3. CRs 16,50,000Correct
  4. DRs 3,50,000

Explanation

Interest on the specific borrowing for the year is 2,00,00,000 x 10% = Rs 20,00,000. AS 16 requires income earned on temporary investment of that borrowing to be deducted from the borrowing costs eligible for capitalisation. Eligible amount = 20,00,000 - 3,50,000 = Rs 16,50,000. Rs 23,50,000 wrongly adds the investment income.

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