K Ltd. began construction of a new building at an estimated cost of 7 lakh on 1st April, 20X1. To finance construction of the building it obtained a…

3. (a) Either (i) Calculation of capitalization rate on borrowings other than specific borrowings Amount of loan (₹) Rate of interest Amount of interest (₹) 7,00,000 12% 84,000 9,00,000 11% 99,000 16,00,000 1,83,000 Weighted average rate of interest (1,83,000/ 16,00,000) x 100 11.4375% (ii) 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, 20X1 1,50,000 Specific borrowing 1,50,000 x 9% x 10/12 11,250 1 st August, 20X1 2,00,000 Specific borrowing 50,000 x 9% x 10/12 3,750 General borrowing 1,50,000x11.4375% x 6/12 8,578.125 1 st October, 20X1 3,50,000 General borrowing 3,50,000x11.4375% x 4/12 13,343.75 1 st January, 20X2 1,00,000 General borrowing 1,00,000x11.4375% x 1/12 953.125 37,875 Note: Since construction of building started on 1st April, 20X1, it is presumed that all the later expenditures on construction of building had been incurred at the beginning of the respective month. (iii) Total expenses to be capitalized for building Particulars ₹ Cost of building ₹ (1,50,000+2,00,000+3,50,000+1,00,000) 8,00,000 Add: Amount of interest to be capitalized 37,875 8,37,875 (iv) Journal Entry Date Particulars Particulars ₹ 31.1.20X2 Building account Dr. 8,37,875 To Bank account 8,00,000 To Interest payable (borrowing cost) 37,875 (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 31.1.20X2. Alternatively, following journal entry may be passed if interest is paid on the date of capitalization: Date Particulars Particulars ₹ 31.1.20X2 Building account Dr. 8,37,875 To Bank account 8,37,875 (Being expenditure incurred on construction of building and borrowing cost thereon capitalized)