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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Vindhya Cements Ltd. is building a plant, which is a qualifying asset. Construction started on 1 April 2025. Because of a labour dispute, active development was suspended from 1 August 2025 to 30 September 2025 (2 months), an extended period. Work resumed on 1 October 2025 and continued till 31 March 2026. Specific loan of Rs 3,00,00,000 carries 10% p.a. interest. What borrowing cost is capitalised for 2025-26?

Rs 25,00,000 is capitalised. Annual interest is Rs 30,00,000, but AS 16 requires capitalisation to be suspended during extended periods when active development is interrupted. The two months of interest, Rs 5,00,000, is expensed, leaving Rs 25,00,000 to capitalise.

  1. ARs 30,00,000
  2. BRs 25,00,000Correct
  3. CRs 27,50,000
  4. DRs 20,00,000

Explanation

Total interest for 12 months = 3,00,00,000 x 10% = Rs 30,00,000. AS 16 requires suspension of capitalisation during extended periods when active development is interrupted. Interest for the 2 months = Rs 5,00,000 is charged to profit and loss. Capitalised = 30,00,000 - 5,00,000 = Rs 25,00,000.

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