Case: Mahanadi Power Ltd has no specific borrowings. Its general borrowings outstanding throughout the year are ₹40,00,000 at 9% and ₹60,00,000 at 12%. It spent ₹30,00,000 on a qualifying asset on 1 April and ₹20,00,000 on 1 October; the asset is still under construction at 31 March. Borrowing cost to be capitalised under AS 16 is:

Correct answer: C) ₹4,32,000

Explanation

Capitalisation rate = weighted average cost of general borrowings = (3,60,000 + 7,20,000) / 1,00,00,000 = 10.8%. Expenditure weighted for time: 30,00,000 x 10.8% x 12/12 = 3,24,000; 20,00,000 x 10.8% x 6/12 = 1,08,000. Amount capitalised = ₹4,32,000. A simple average rate of 10.5% would be incorrect because the borrowings are of different amounts.