On 1st April, 2024, A Limited started the construction of an Office Building (qualified asset). The land under the building is regarded as a…

(i) Computation of borrowing cost to be capitalized for specific borrowings and general borrowings based on weighted average accumulated expenses Date of incurrence of expenditure Amount spent Financed through Calculation ₹ 1 st April 2024 4,00,000 Specific borrowing 4,00,000 x 12% x 10/12 40,000 1 st August 2024 10,00,000 Specific borrowing 10,00,000 x 12% x 10/12 1,00,000 1 st December 2024 25,00,000 General borrowing 25,00,000 x 10.8% x 2/12 45,000 31 st January 2025 5,00,000 General borrowing 5,00,000 x 10.8% x 0/12 Nil 1,85,000 Less: interest income on borrowing (15,000) Total amount borrowing cost to be capitalized 1,70,000 (ii) Journal Entry Date Particulars Particulars ₹ 31.1.2025 Building account Dr. 45,70,000 To Bank account 44,00,000 To Interest payable (borrowing cost) 1,70,000 (Being expenditure incurred on construction of building and borrowing cost thereon capitalized) (iii) Depreciation on building for the year ending 31.3.2025 Cost of building: 45,70,000 Life of building: = 20 years Depreciation: = (45,70,000/20) x 2/12 = 38,083.33 (iv) Carrying Value of Building on 31st March 2025: Carrying Value = Cost of Building - Accumulated Depreciation = 45,70,000 - 38,083.33 = 45,31,917 Working Notes: 1. Calculation of capitalization rate on borrowings other than specific borrowings Amount of loan (₹) Rate of interest Amount of interest (₹) 20,00,000 15% 3,00,000 30,00,000 8% 2,40,000 50,00,000 5,40,000 Weighted average rate of interest = (5,40,000 / 50,00,000) × 100 = 10.8%* 2. Total expenses to be capitalized for building Cost of building ₹ (4,00,000 + 10,00,000 + 25,00,000 + 5,00,000) 44,00,000 Add: Amount of interest to be capitalized 1,70,000 45,70,000