On 1st April, 2023, Green Limited started the construction of an Office Building (qualified asset). The land under the building is regarded as a…

CA Intermediate · Advanced Accounting · MTP · September 2025
On 1st April, 2023, 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, 2023 were as follows: Amount of Loan Rate of Interest per annum 20,00,000 15% 30,00,000 8% The construction of building started on 1st April, 2023 and was completed on 31st January, 2024 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 ₹ 1 st April, 2023 4,00,000 1 st August, 2023 10,00,000 1 st December, 2023 25,00,000 31 st January, 2024 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, 2024. (iv) Carrying value of building as on 31st March, 2024.

Suggested Answer and Working Notes:

(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 2023 4,00,000 Specific borrowing 4,00,000 x 12% x 10/12 40,000 1 st August 2023 10,00,000 Specific borrowing 10,00,000 x 12% x 10/12 1,00,000 1 st December 2023 25,00,000 General borrowing 25,00,000 X 10.8% x 2/12 45,000 31 st January 2024 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 ₹ 31.1.2024 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) Note: In the above journal entry, it is assumed that interest amount will be paid at the year end. Hence, entry for interest payable has been passed on 31.1.2024. (iii) Depreciation = 45,70,000 / 20 years = 38,083 (iv) Carrying amount = 45,70,000 - 38,083 = 45,31,917

Topics: AS 16

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