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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Zenith Textiles Ltd. is financing the construction of a new plant with a bank loan. Which of the following costs related to this financing is a borrowing cost under AS 16?

Commitment charges paid on the undrawn part of a sanctioned bank loan are a borrowing cost under AS 16. Equity dividends and notional returns on own reserves or accruals are not borrowing costs, because they are not costs incurred on borrowed funds.

  1. ADividend paid on equity share capital raised for the plant
  2. BNotional return expected on the company's own free reserves used for the plant
  3. CCommitment charges paid to the bank on the undrawn part of the sanctioned loanCorrect
  4. DCost of the company's internal accruals invested in the plant

Explanation

AS 16 includes interest, commitment charges on borrowings, amortisation of discounts or premiums, ancillary costs and certain finance charges as borrowing costs. Dividends on equity capital and notional returns on own funds are appropriations or imputed costs, not borrowing costs.

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