Real Estate Ltd. is a construction company and decided to construct a huge office building for its use since financial year 2022-2023. The…

CA Final · Financial Reporting · PYQS · May 2026
Real Estate Ltd. is a construction company and decided to construct a huge office building for its use since financial year 2022-2023. The construction of office building consists of five floors. It is expected that the full office building will be constructed over several years but floor I, floor II and floor III of the building will be operational as soon as they are completed. During the initial stage, the project was funded out of internal accruals. However, the company decided to avail a term loan for the project from 1 st April, 2025 and load the same to the project expenses. Following are the details of the work done on different floors of the office building up to the financial year 2025-2026: (in lakhs) Floor I (₹ ) Floor II (₹ ) Floor III (₹ ) Floor IV (₹ ) Floor V (₹ ) Cash expenditure 60 40 60 100 120 Building materials purchased 88 70 74 120 152 Total expenditure 148 110 134 220 272 Total expenditure on all phases 884 Loan taken @ 12% in the beginning of the year 900 After taking substantial period for construction, floor I, floor II and floor III have become operational, at the mid of the year i.e. on 30 th September, 2025. The project was continuing for the rest of the floors. You are required to find out the total amount to be capitalized and to be expensed during the financial year 2025-2026.

Suggested Answer and Working Notes:

Table showing computation of interest expenses on floors on whose construction is completed and floors whose construction is in progress (All figures are in lakhs) Interest expense on loan - 900 lakhs at 12% 108 Total cost of Floors I, II and III (148 + 110 + 134) 392 Total cost of Floors IV and V (220 + 272) 492 Total cost of all 5 floors till 2025-2026 884 Total loan 900 Interest on loan used for Floors I, II & III, based on proportionate Loan amount [(108/884) x 392] 47.89 (approx.) Interest on loan used for Phases IV & V, based on proportionate Loan amount [(108/884) x 492] 60.11 (approx.) Accounting treatment: 1. For Floors I, II and III: Since Floors I, II and III have become operational at mid of the year, half of the interest amount of 23.945 lakhs (i.e. 47.89/2) relating to Floors I, II and III should be capitalized (in the ratio of asset costs 148:110:134) and added to respective assets in Floors I, II and III and remaining half of the interest amount of 23.945 lakhs (i.e. 47.89/2) relating to Floors I, II and III should be expensed off during the year. 2. For Floors IV and V: Interest of 60.11 lakhs relating to Floors IV and V should be held in Capital Work-in-Progress till assets construction work is completed and thereafter capitalized in the ratio of cost of assets. No part of this interest amount should be charged/expensed off during the year since the work on these phases has not been completed yet. 3. During the financial year 2025-26, the total interest to be capitalized will be - 84.055 (23.945 + 60.11) and - 23.945 lakhs will be expensed to statement of profit and loss.

Topics: Ind AS 23, Ind AS 19

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