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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Vihaan Builders Ltd. has no specific borrowing for a plant under construction. During the year it had two general borrowings: Rs 40,00,000 at 9% and Rs 60,00,000 at 11% p.a. Expenditure on the qualifying asset was Rs 25,00,000 for the full year, funded from general borrowings. What borrowing cost is capitalised?

Rs 2,55,000 is capitalised. The capitalisation rate is the weighted average cost of general borrowings, being Rs 10,20,000 interest on Rs 1 crore, or 10.2%. Applied to the Rs 25,00,000 expenditure for the year, this gives Rs 2,55,000.

  1. ARs 2,50,000
  2. BRs 2,25,000
  3. CRs 2,55,000Correct
  4. DRs 2,75,000

Explanation

Capitalisation rate is the weighted average of general borrowings: total interest = 3,60,000 + 6,60,000 = 10,20,000 on 1,00,00,000 = 10.2%. Capitalised = 25,00,000 x 10.2% = 2,55,000. Rs 2,50,000 uses a simple 10% rate; Rs 2,25,000 uses 9% only.

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