On 1st April, 20X1, A Ltd. contracted for the construction of a building for 22,00,000. The land under the building is regarded as a separate asset…

Incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. The amount of borrowing costs eligible for capitalization, in cases where the funds are borrowed generally, should be determined based on the capitalisation rate and expenditure incurred in obtaining a qualifying asset. The costs incurred should first be allocated to the specific borrowings. Analysis of expenditure: Date Expenditure ('000) Amount allocated in general borrowings ('000) Weighted for period outstanding ('000) 1 st April, 20X1 200 0 0 30 th June, 20X1 600 100* 100 x 9/12 = 75 31 st Dec., 20X1 1,200 1,200 1,200 × 3/12 = 300 31 st March, 20X2 200 200 200 × 0/12 = 0 Total 2,200 375 *Specific borrowings of 7,00,000 fully utilized on 1st April & on 30th June to the extent of 5,00,000 hence remaining expenditure of 1,00,000 allocated to general borrowings. The capitalisation rate relating to general borrowings should be the weighted average of the borrowing costs applicable to the entity's borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Capitalisation rate = (10,00,000×12.5%) + (15,00,000×10%) / 10,00,000+15,00,000 = 11% Borrowing cost to be capitalized: Amount (₹) On specific loan 65,000 On General borrowing (3,75,000 x 11%) 41,250 Total 1,06,250 Less: interest income on specific borrowings (20,000) Amount eligible for capitalization 86,250 Therefore, the borrowing costs to be capitalized are - 86,250.