Suppose mr. A took a specific loan for construction of factory rs 20lakhs on 1.04.2014,and used such loan as follows, 1.07.2014--14lakhs, 1.10.2014--5lakhs, 1.12.2014--1lakh, and construction completed on 1.5.2015,then calculate borrowing cost to be capitalise as per as 16 , rate of interest is 14%p.a.
Here is the correct method under AS 16 (Specific Borrowing – Capitalisation to the extent of actual expenditure utilised):
Loan taken: Rs 20,00,000 on 1-4-2014
Construction completed: 1-5-2015
Interest rate: 14% p.a.
Capitalisation is based on actual expenditures and the period for which each portion is outstanding until completion.
Expenditures during construction:
| Date of Expenditure | Amount (Rs in lakhs) | Period outstanding up to 1-5-2015 | Months |
|---|---|---|---|
| 1-7-2014 | 14 | Jul-14 to Apr-15 | 10 |
| 1-10-2014 | 5 | Oct-14 to Apr-15 | 7 |
| 1-12-2014 | 1 | Dec-14 to Apr-15 | 5 |
Weighted average expenditure (WAEP):
= (14 × 10) + (5 × 7) + (1 × 5)
= 140 + 35 + 5
= 180 lakh-months
Construction period length = 13 months (Apr-14 to Apr-15)
So,
WAEP = 180 / 13
= 13.846 lakhs
Interest to be capitalised:
= WAEP × 14% × (13/12)
= 13.846 × 0.14 × 13/12
≈ Rs 2.10 lakhs
Therefore,
Borrowing Cost to be Capitalised = Rs 2,10,000 (approx.)
CAclubindia
