Chapter-16

AS 16: Borrowings Costs

Take Ltd. has borrowed % 30 lakhs from State Bank of India during the financial year 20X1-20X2. The
borrowings are used to invest in shares of Give Ltd., a subsidiary company of Take Ltd., which is implementing
a new project, estimated to cost 7 50 lakhs. As on 31st March, 20X2, since the said project was not complete,
the directors of Take Ltd. resolved to capitalise the interest accruing on borrowings amounting to ? 4 lakhs
and add it to the cost of investments. Comment.
Period of Capitalisation of Borrowing Cost on Qualifying Asset
Question 2
H Ltd. incurs borrowing costs for the purpose of construction of a qualifying asset for its own use. The
construction gets completed on May 31, 20X1. However, decoration work is under process which is expected
to be completed by November 20X11 after which H Ltd. will be able to start using the said asset for its own
use. H Ltd. wants to capitalize the eligible borrowing costs incurred up to November 20X1.
Question 3
ABC Ltd. is in the process of getting an entertainment park constructed. For this purpose, it has taken loan
from a bank. The said park consists of several rides and facilities, each of which can be used individually.
Three fourth part of the park has been constructed and can be opened up for public, while construction on
the remaining part is continuing. Whether the capitalization of borrowing cost should continue for the whole
park until construction continues?
If Multiple Assets are Purchased/Constructed using Specific Borrowing
Question 4
PRM Ltd. obtained a loan from a bank for = 120 lakhs on 30.04.20X1. It was utilised as follows:
Particulars ₹ in lakhs
Construction of a shed 50
Purchase of a machinery 40
Working Capital 20
Advance for purchase of truck 10
Construction of shed was completed in March 20X2. The machinery was installed on the date of acquisition.
Delivery of truck was not received. Total interest charged by the bank for the year ending 31.03.20X2 was ₹
18 lakhs. Show the treatment of interest.
Question 5
Not a qualifying asset (10/120) x18 =1.5 7.5 10.5 The company has obtained Institutional Term Loan of ₹ 580
lakhs for modernisation and renovation of its Plant & Machinery. Plant & Machinery acquired under the
modernisation scheme and installation completed on 31 st March, 20X2 amounted to ₹ 406 lakhs, ₹ 58 lakhs
has been advanced to suppliers for additional assets (additional asset has taken substantial period of time in
its installation) and the balance loan of ₹ 116 lakhs has been utilised for working capital purpose. The
Accountant is on a dilemma as to how to account for the total interest of ₹ 52.20 lakhs incurred during 20X1-
20X2 on the entire Institutional Term Loan of ₹ 580 lakhs.
Question 6
On 1st April, 20X1, Amazing Construction Ltd. obtained a loan of % 32 crores to be utilised as under:
 (i) Construction of sealink across two cities (work was held up totally ₹ 25 crores
for a month during the year due to high water levels)
(ii) Purchase of equipments and machineries ₹ 3 crores
(iii) Working Capital ₹ 2 crores
(iv) Purchase of vehicles ₹ 50,00,000
(v) Advance for tools/Cranes etc. ₹ 50,00,000
(vi) Purchase of Technical know-how ₹ 1 crores
(vii) Total Interest charged by the bank for the year ending 31st March ₹ 80,00,000
20X2

Question 7
Expert Limited issued 12% secured debentures of ₹ 100 lakhs on 01.06.20X1. Money raised from debentures
to be utilized as under:
Intended Purpose Amount (₹ in lakhs)
Construction of factory building 40
Working Capital 30
Purchase of Machinery 15
Purchase of Furniture 2
Purchase of truck 13
Additional Information:
(i) Interest on debentures for the Financial Year 20X1-X2 was paid by the Company.
(ii) During the year, the company invested idle fund of ₹ 5 lakhs (out of the money raised from
debentures) in Bank's fixed deposit and earned interest of ₹ 50,000.
(iii) In March, 20X2 construction of factory building was not completed (it is expected that it will take
another 6 months).
(iv) In March 20X2, Machinery was installed and ready for its intended use.
(v) Furniture was put to use at the end of March 20X2.
(vi) Truck is going to be received in April, 20X2.

You are required to show the treatment of interest as per AS 16 in respect of borrowing cost for the year
ended 31st March, 20X2 in the Books of Expert Limited.

Question 8
Harish Construction Company is constructing a huge building project consisting of four phases. It is expected
that the full building will be constructed over several years but Phase I and Phase II of the building will be
started as soon as they are completed.
Following is the detail of the work done on different phases of the building during the current year:
(₹ in
Lakhs)
Particulars Phase I Phase II Phase III Phase IV
Cash expenditure 10 30 25 30
Building purchased 24 34 30 38
Total expenditure 34 64 55 68
Total expenditure of all phases 221
Loan taken @ 15% at the beginning of the year 200
During mid of the current year, Phase I and Phase II have become operational. Find out the total amount to
be capitalized and to be expensed during the year.
If Single Qualifying Asset is Purchased/Constructed using Specific & General Borrowing
Question 9
Rainbow Limited borrowed an amount of ₹ 150 crores on 1.4.20X1 for construction of boiler plant @ 11%
p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of capital is 13% p.a.,
the accountant of Rainbow Ltd. capitalized ₹ 19.50 crores for the accounting period ending on 31.3.20X2.
Due to surplus fund out of ₹ 150 crores, income of ₹ 3.50 crores was earned and credited to profit and loss
account. Comment on the above treatment of accountant with reference to relevant accounting standard.
Question 10
ABC Limited has started construction of an asset on 1st December, 20X1, which continues till 31st March,
20X2 (and is expected to go beyond a year). The entity has not taken any specific borrowings to finance the
construction of the asset but has incurred finance costs on its general borrowings during the construction
period. The directly attributable expenditure at the beginning of the month on this asset was ₹ 10 lakh in
December 20X1 and ₹ 4 lakh in each of the months of January to March 20X2. At the beginning of the year,
the entity had taken Inter Corporate Deposits of ₹ 20 lakh at 9% rate of interest and had an overdraft of ₹ 4
lakh, which increased to ₹ 8 lakh on 1st March, 20X2. Interest was paid on the overdraft at 10% until 1st
January, 20X2 and then the rate was increased to 12%. You are required to calculate the annual capitalization
rate for computation of borrowing cost in accordance with AS 16 ‘Borrowing Costs’.
Question 11

X Ltd. began construction of a new building on 1st January, 20X1. It obtained ₹ 1 lakh special loan to finance
the construction of the building on 1st January, 20X1 at an interest rate of 10%. The company’s other
outstanding two non-specific loans were:

Amount Rate of Interest

The expenditures that were made on the building project were as follows:
₹
1st January 20X1 2,00,000
1st April 20X1 2,50,000
1st July 20X1 4,50,000
1st December 20X1 1,20,000
Building was completed by 31st December 20X1. Following the principles prescribed in AS 16 ‘Borrowing
Cost,’ calculate the amount of interest to be capitalised and pass one Journal Entry for capitalising the cost
and borrowing cost in respect of the building.
Question 12

On 1st April, 20X1, Green Limited started the construction of an Office Building (qualified asset). The land
under the building is regarded as a separate asset and is not a part of qualifying asset.
For the purpose of construction of building, the company raised a specific loan of ₹ 14 lakhs from a Bank at
an interest rate of 12% per annum. An interest income of ₹ 15,000 was earned on this loan while it was held
in anticipation of payments.
The company's other outstanding loans on 1st April, 20X1 were as follows:

Amount of Loan Rate of Interest per annum

The construction of building started on 1st April, 20X1 and was completed on 31st January, 20X2 when it
was ready for its intended use. Up to the date of completion of the building, the following payments were
made to the contractor:
Payment date Amount in ₹
1st April, 20X1 4,00,000
1st August, 20X1 10,00,000
1st December, 20X1 25,00,000
 31st January, 20X2 5,00,000
The life of building is estimated to be 20 years and depreciation is calculated on straight line method.
You are required to:
(i) Calculate the amount of borrowing cost to be capitalized.
(ii) Pass initial journal entry to recognise the cost of building.
(iii) Depreciation on building for the year ending 31st March, 20X2.
(iv) Carrying value of building as on 31st March, 20X2.
Exchange Difference on Foreign Currency Borrowing to be Treated as Borrowing Cost
Question 13

ABC Builders Limited had borrowed a sum of US $ 15,00,000 at the beginning of Financial year 20X1-X2 for
its residential project at London Interbank Offered Rate (LIBOR) + 4 %. The interest is payable at the end of
the Financial Year. At the time of availing the loan, the exchange rate was ₹ 72 per US $and the rate as on
31st March, 20X2 was ₹ 76 per US$. If ABC Builders Limited borrowed the loan in Indian Rupee equivalent,
the pricing of loan would have been 9.50%. Compute Borrowing Cost and exchange difference for the year
ending 31st March, 20X2 as per applicable Accounting Standards. (Applicable LIBOR is 1%).
Miscellaneous
Question 14
Glen Ltd. began construction of a new building on 1st January, 20X1. On 1st April, 20X1, following two loans
were obtained to fund the construction cost:
(i) Loan of ₹ 60,00,000 from Data Bank Ltd. was taken at interest rate of 8% per annum. This loan was
fully utilized for construction of the new building.
(ii) Loan of ₹ 20,00,000 from Satya Bank Ltd. Out of this, loan amount of ₹ 6,00,000 was utilized for
working capital purpose. Total interest of ₹ 1,92,000 were paid to Satya Bank Ltd. for the financial
year 20X1-X2.
Construction of the new building was completed on 31st January, 20X2 and was ready for its intended use
on the same date.
None of the loan was repaid during the year. The building is a qualifying asset for the purpose of AS-16.
Out of loan from Data Bank Ltd., surplus funds were temporarily invested for the short period of time. This
temporary investment earned interest of ₹ 30,000.
You are required to calculate the amount of interest to be capitalized and to be charged to profit and loss
account from the total interest incurred as borrowing cost during the year 20X1-X2 (as per AS-16).
Question 15
On 1st April, 20X1 Workhouse Limited took a loan from a Financial Institution for ₹ 25,00,000 for the
construction of Building.
The rate of interest is 12%. In addition to above loan, the company has taken multiple borrowings as follows:
(i) 8% Debentures ₹ 15,00,000
(ii) 15% Term Loan ₹ 30,00,000
(iii) 10% Other Loans ₹ 18,00,000
The company has utilised the above funds in construction/purchase of the following assets:
(i) Building ₹ 70,00,000
(ii) Furniture ₹ 22,00,000
(iii) Plant & Machinery ₹ 90,00,000
(iv) Factory Shed ₹ 43,00,000
The construction of Building, Plant & Machinery and Factory Shed was completed on 31st March 20X2.
Readymade Furniture was purchased directly from the market. The factory was ready for production on 1st
April 20X2. You are required to calculate the borrowing cost for both qualifying and non-qualifying assets.
Question 16
How will interest be capitalized when qualifying assets are funded by borrowings in the nature of bonds that
are issued at a discount? X Ltd. issued in year 1, a 3year 10% p.a. (interest paid annually) bond with a face
value of ₹ 1,00,000 at a price of ₹ 90,000 to finance a qualifying asset which is ready for intended use at the
end of year 2. Compute the amount of borrowings costs to be capitalized if the company uses for amortization
of discount straight line basis.
Question 17
Loyal Ltd. has undertaken a project for expansion of capacity as per the following details:
Plan (₹) Actual (₹)
October, 20X1 5,00,000 4,00,000
November, 20X1 6,50,000 7,95,000
December, 20X1 20,00,000 -
January, 20X2 2,00,000 50,000
February, 20X2 9,00,000 2,00,000
March, 20X2 10,00,000 12,00,000

The company pays to its bank interest at a rate of 15% p.a., which is debited on a monthly basis. During the
half year, company had ₹ 20 lakh overdraft up to 31st December, surplus cash in January and again overdraft
of ₹ 14 lakh from 1.2.20X2 and ₹ 30 lakh from 1.3.20X2. The company had a strike during December and
hence could not continue the work during said period. However, the substantial administrative work related
to the project was continued. Onsite work was again commenced on 1st January and all the work were
completed on 31st March. Assume that expenditure was incurred on 1st day of each month.
Calculate interest to be capitalized giving reason wherever necessary. Assume overdraft will be less, if there
is no capital expenditure.