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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Vindhya Engineering Ltd. is building a plant (a qualifying asset) financed from its general borrowings. During the year, the expenditure on the plant was Rs 40,00,000 (weighted average for the period). The company's general borrowings consisted of a 12% term loan of Rs 1,00,00,000 and 10% debentures of Rs 1,00,00,000, both outstanding for the full year. What is the borrowing cost to be capitalised for the plant for the year?

The amount to be capitalised is Rs 4,40,000. For general borrowings AS 16 requires applying a weighted average capitalisation rate to the expenditure on the qualifying asset. Total interest of Rs 22,00,000 on Rs 2,00,00,000 gives 11%, and 11% of Rs 40,00,000 is Rs 4,40,000.

  1. ARs 4,40,000Correct
  2. BRs 4,00,000
  3. CRs 4,80,000
  4. DRs 22,00,000

Explanation

For general borrowings, the capitalisation rate is the weighted average of the borrowing costs. Interest = 12,00,000 + 10,00,000 = 22,00,000 on total borrowings of 2,00,00,000, so rate = 11%. Capitalised = 11% x 40,00,000 = Rs 4,40,000. Using only 10% gives Rs 4,00,000 and only 12% gives Rs 4,80,000, which are wrong because a weighted average rate is required.

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