R Limited commenced the construction of a factory building on 1 st January, 2023. The construction process is expected to take about 18 months from…

CA Final · Financial Reporting · PYQS · September 2025
R Limited commenced the construction of a factory building on 1 st January, 2023. The construction process is expected to take about 18 months from 1 st January, 2023 to 30 th June, 2024. The factory building meets the definition of a qualifying asset. R Limited has incurred the following expenditure for the construction: Date Amount (in lakhs) 1 st January, 2023 10 30 th June, 2023 40 31 st March, 2024 30 30 th June, 2024 20 On 1 st July, 2023, R Limited obtained a term loan of 100 lakhs from a nationalized bank at an interest rate of 12% per annum. The proceeds from the loan form a part of the company's general borrowings, which it uses to finance the construction of the factory building. R Limited had no borrowings (general or specific) before 1 st July, 2023 and did not incur any borrowing costs before that date. R Limited incurred 50 lakhs of construction costs before obtaining general borrowings on 1 st July, 2023 and 50 lakhs after obtaining the general borrowings. You are required to calculate the borrowing costs that R Limited is permitted to capitalize as a part of the building cost for each of the financial years ended 31 st March, 2023, 31 st March, 2024 and 31 st March, 2025.

Suggested Answer and Working Notes:

All figures are ₹ in lakhs. Calculation of borrowing cost for financial year 2022-2023 Expenditure Capitalization Period (current year) Weighted average Accumulated Expenditure Date Amount 1 st January 2023 10 Lakhs 0/3 Nil Borrowing Costs eligible for capitalisation for financial year 2022-2023 = NIL. R Ltd. cannot capitalise borrowing costs before 1 st July 2023 (the day it starts to incur borrowing costs). Calculation of borrowing cost for financial year 2023-2024 Date Expenditure amount Capitalization period (current year) Weighted average accumulated expenditure 1 st January 2023 10 Lakhs 9/12 7.50 30 th June 2023 40 Lakhs 9/12 30.00 31 st March 2024 30 Lakhs 0/12 Nil Total 37.50 Borrowing Costs eligible for capitalisation for financial year 2023-2024 = 37.50 x 12% = 4.50 Lakh Cost of the Qualifying asset till date i.e. 31 st March 2024 = 10 Lakhs + 40 Lakhs + 30 Lakhs + 4.50 Lakhs = 84.50 Lakhs Calculation of borrowing cost for financial year 2024-2025 Expenditure Capitalization Period (current year) Weighted average Accumulated Expenditure Date Amount 1 st January, 2023 10 Lakhs 3/12 2.5 Lakhs 30 th June, 2023 40 Lakhs 3/12 10 Lakhs 31 st March, 2024 30 Lakhs 3/12 7.5 Lakhs 31 st March, 2024 4.50 Lakhs 3/12 1.125 Lakhs 30 th June, 2024 20 Lakhs 0/12 NIL Total 21.125 Lakhs Borrowing costs eligible for capitalisation = 21.125 lakh x 12% = 2.535 lakh Note: Alternatively, one may present the calculation of borrowing cost to be capitalised for the financial year 2024-2025 as follows: Cost as on 1 st April 2024 = [(₹ 84.50 Lakhs x 3/12) + (20Lakhs x 0/12)] = 21.125 Lakhs

Topics: Ind AS 23, Ind AS 19

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