Loyal Ltd. has undertaken a project for expansion of capacity as per the following details: Plan (₹) Actual (₹) October, 2023 5,00,000 4,00,000…
CA Intermediate · Advanced Accounting · RTP · September 2024
Loyal Ltd. has undertaken a project for expansion of capacity as per the following details: Plan (₹) Actual (₹) October, 2023 5,00,000 4,00,000 November, 2023 6,50,000 7,95,000 December, 2023 20,00,000 - January, 2024 2,00,000 50,000 February, 2024 9,00,000 2,00,000 March, 2024 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 31 st December, surplus cash in January and again overdraft of 14 lakh from 1.2.2024 and 30 lakh from 1.3.2024. 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 1 st January and all the work were completed on 31 st March. Assume that expenditure was incurred on 1 st day of each month. Calculate interest to be capitalized giving reason wherever necessary. Assume overdraft will be less, if there is no capital expenditure.
Suggested Answer and Working Notes:
Loyal Ltd. Month Actual Expenditure (₹) Interest on outstanding amount @ 15% p.a. Interest capitalized (₹) Outstanding amount (₹) Cumulative amount (₹) 1 2 3 October, 2023 4,00,000 4,00,000*15%*1/12 5,000 4,05,000 4,05,000 November, 2023 7,95,000 (4,05,000 + 7,95,000)*15%*1/12 15,000 (4,05,000 + 7,95,000 + 15,000) 12,15,000 December, 2023 - (12,15,000)*15%*1/12 15,188 12,15,000 + 15,188 12,30,188 January, 2024 50,000 - - 12,30,188 + 50,000 12,80,188 February, 2024 2,00,000 14,00,000*15%*1/12 17,500 12,80,188 + 2,00,000 + 17,500 14,97,688 March, 2024 12,00,000 (14,97,688 + 12,00,000)*15%*1/12 33,721 14,97,688 + 12,00,000 + 33,721 27,31,409 26,45,000 86,409 Note: As per para 18 of AS 16, 'Borrowing Cost', capitalisation of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Therefore, the interest for that period i.e. for the month of December has also been capitalized.During January, the company did not incur any interest as there was surplus cash in January. Therefore, no amount should be capitalized during January as per para 14(b) of AS 16.During February, actual overdraft (borrowings) was 14lakh only. Hence, interest of 17,500 on 14,00,000 has been calculated even though actual expenditure on project exceed 14lakh.
Topics: AS 16
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