Ace Limited borrowed 25 Lakhs from ABN Bank during the financial year 2023-24. Ace Limited used these funds to invest in Equity shares of Kay…

CA Intermediate · Advanced Accounting · PYQS · January 2025
Ace Limited borrowed 25 Lakhs from ABN Bank during the financial year 2023-24. Ace Limited used these funds to invest in Equity shares of Kay Limited. Kay Limited is implementing a new Project, so with these future prospects, Ace Limited invested 25 Lakhs in Kay Limited. As on 31st March, 2024, since the said project was not complete, the directors of Ace Limited capitalised the interest on loan amounting to 2 lakhs and thus added the amount of interest to the cost of Investments. Market value of these investments on 31st March, 2024 is 24 Lakhs. Identify the correct statement, considering the above facts as per AS 16:
(A) Interest paid is acquisition charge, hence directors of Ace Limited correctly added the amount of interest in cost of investment.
(B) Since project is qualifying Asset, directors of Ace Limited correctly added the amount of interest in cost of investments.
(C) Ace Limited invested in equity share which is not a qualifying asset, therefore directors are wrong to add the interest in cost of investments, rather it should be charged to profit and loss account.
(D) Since project is qualifying asset, directors of Ace Limited should capitalise the interest amount to market value of investments, rather than cost of investments.

Suggested Answer and Working Notes:

Correct Answer: Option (C)

Ace Limited invested in equity share which is not a qualifying asset, therefore directors are wrong to add the interest in cost of investments, rather it should be charged to profit and loss account.

Topics: AS 16, AS 1, Applicability of AS

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