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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Yamuna Textiles Ltd borrowed ₹10 crore at 9% p.a. specifically to build a new unit, which was under construction for the whole of 2025-26. Part of the loan was not needed immediately and was temporarily invested, earning ₹4 lakh during the year. What borrowing cost is capitalised for 2025-26?

₹86,00,000 is capitalised. Interest on the specific loan is ₹90 lakh, and AS 16 requires income from temporarily investing unused specific borrowings to be deducted from the amount eligible for capitalisation. So ₹90 lakh less ₹4 lakh leaves ₹86 lakh to be added to the cost of the asset.

  1. A₹90,00,000
  2. B₹86,00,000Correct
  3. C₹94,00,000
  4. D₹4,00,000

Explanation

Interest on the specific loan = ₹10 crore × 9% = ₹90 lakh. AS 16 requires income earned on temporary investment of specific borrowings pending their use to be deducted from the borrowing costs eligible for capitalisation. Capitalised = 90 lakh − 4 lakh = ₹86 lakh. The ₹90 lakh option ignores the investment income. The ₹94 lakh option adds it instead of deducting it.

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