CA Final FR Ind AS 23 Borrowing Cost Important Solved Questions

Ind AS 23, Borrowing Cost, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams

Question 1 –

An entity constructs a new head office building commencing on 1st September 20X1, which continues till 31st December  20X1. Directly attributable  expenditure  at  the beginning of the month on this asset are Rs. 100,000 in September 20X1 and Rs. 250,000 in each of the months of October to December 20X1.

The entity has not taken any specific borrowings to finance the construction of the asset, but has incurred finance costs on its general borrowings during the construction period. During the year, the entity had issued 10% debentures with a face value of Rs. 20 lacs and had an overdraft of Rs. 500,000, which increased to Rs. 750,000 in December 20X1. Interest was paid on the overdraft at 15% until  1 October 20X1, then the rate  was increased to 16%.

Calculate the capitalization rate for computation of borrowing cost in accordance  with Ind AS 23 ‘Borrowing Costs’.

Solution –

Since the entity has only general borrowing hence first step will be to compute the capitalisation rate. The capitalisation rate of the  general  borrowings of  the  entity  during the period of construction is calculated as follows:

Finance cost on Rs. 20 lacs 10% debentures during September – December 20X1	Rs. 66,667
Interest @ 15% on overdraft of Rs. 5,00,000 in September 20X1	Rs. 6,250
Interest @ 16% on overdraft of Rs. 5,00,000 in October and November 20X1	Rs. 13,333
Interest @ 16% on overdraft of Rs. 750,000 in December 20X1	Rs. 10,000
Total finance costs in September – December 20X1	Rs. 96,250

Weighted average borrowings during period

Capitalisation rate = Total finance costs during the  construction  period  /  Weighted  average borrowings during the construction period

= 96,250 / 25,62,500 = 3.756%

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Question 2 –

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 specific loan of ` 2 lakh from a financial institution at an interest rate of 9% per annum.

The company’s other outstanding loans were:

Amount	Rate of Interest per annum
Rs. 7,00,000	12%
Rs. 9,00,000	11%

The expenditure incurred on the construction was:

April, 2017	Rs. 1,50,000
August, 2017	Rs. 2,00,000
October, 2017	Rs. 3,50,000
January, 2018	Rs. 1,00,000

The construction of building was completed by 31st  January, 2018. Following the provisions of Ind AS 23 ‘Borrowing Costs’, calculate the amount of interest to be capitalized and pass necessary journal entry for capitalizing the cost and borrowing cost in respect of  the building as on 31st January, 2018.

Solution –

(i) Calculation of capitalization rate on borrowings other than specific borrowings

Amount of loan (Rs.)	Rate of interest	Amount of interest (Rs.)
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	Rs.
1st April, 2017	1,50,000	Specific borrowing	1,50,000 x 9% x 10/12	11,250
1st August, 2017	2,00,000	Specific borrowing	50,000 x 9% x 10/12	3,750
		General borrowing	1,50,000 x 11.4375% x 6/12	8,578.125
1st October, 2017	3,50,000	General borrowing	3,50,000 x 11.4375% x 4/12	13,343.75
1st January, 2018	1,00,000	General borrowing	1,00,000 x 11.4375% x 1/12	953.125
				37,875

Note: Since construction of building started on 1st April, 2017, 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

	Rs.
Cost of building Rs. (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		Rs.	Rs.
31.1.2018	Building account	Dr.	8,37,875
	To Bank account			8,00,0000
	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 31.1.2018.

Alternatively, following journal entry may be passed if  interest is paid on the  date of capitalization:

Date	Particulars		Rs.	Rs.
31.1.2018	Building account	Dr.	8,37,875	8,37,875
	To Bank account
	(Being expenditure incurred on construction of building and borrowing cost thereon capitalized)

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Question 3 –

On 1st April, 20X1, entity A contracted for the construction of a building for Rs. 22,00,000. The land under the building is regarded as a separate asset and is not  part  of  the  qualifying assets. The building was completed at the end of March, 20X2, and during the period the following payments were made to the contractor:

Payment date	Amount (Rs. ’000)
1st April, 20X1	200
30th June, 20X1	600
31st December, 20X1	1,200
31st March, 20X2	200
Total	2,200

Entity A’s borrowings at its year end of 31st March, 20X2 were as follows:

a. 10%, 4-year note with simple interest payable annually, which relates specifically to the project; debt outstanding on 31st  March, 20X2 amounted to  7,00,000.  Interest  of Rs. 65,000 was incurred on these borrowings  during the year, and  interest income   of Rs. 20,000 was earned on these funds while they were held in anticipation of payments.

b. 5% 10-year  note  with  simple  interest  payable  annually;  debt   outstanding  at   1st April, 20X1 amounted to Rs. 1,000,000 and remained unchanged during the year; and

c. 10% 10-year  note  with  simple  interest  payable   annually;  debt   outstanding   at  1st April, 20X1 amounted to Rs. 1,500,000 and remained unchanged during the year.

What amount of the  borrowing  costs  can  be  capitalized  at  year  end  as  per  relevant  Ind AS?

Solution

As per Ind AS 23, when  an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity should determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during  the period less any investment income on the temporary investment of those borrowings.

The amount of borrowing costs eligible for capitalization, in cases where the funds are borrowed generally, should be determined based on  the  expenditure incurred in  obtaining a qualifying asset. The costs incurred should first be allocated to the specific borrowings.

Analysis of expenditure:

Date	Expenditure (Rs.’000)	Amount allocated in general borrowings (Rs.’000)	Weighted for period outstanding (Rs.’000)
1st April 20X1	200	0	0
30th June 20X1	600	100*	100 × 9/12	=	75
31st Dec 20X1	1,200	1,200	1,200 × 3/12	=	300
31st March 20X2	200	200	200 × 0/12	=	0
Total	2,200		375

*Specific borrowings of Rs. 7,00,000 fully utilized on 1st April & on 30th June to the extent of Rs. 5,00,000 hence remaining expenditure of Rs. 1,00,000 allocated to general borrowings.

The expenditure rate relating to general borrowings should be  the  weighted average  of  the borrowing costs applicable to the entity’s borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Borrowing cost to be capitalized:	Amount
	(Rs.)
On specific loan	65,000
On General borrowing (3,75,000 × 11%)	41,250
Total	1,06,250
Less interest income on specific borrowings	(20,000)
Amount eligible for capitalization	86,250
Therefore, the borrowing costs to be capitalized are Rs. 86,250.

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Question 4 –

An entity constructs a new office building commencing on 1st September, 2018, which continues till 31st December, 2018 (and is expected to go beyond a year). Directly attributable expenditure at the beginning of the month on this asset are Rs. 2 lakh in September 2018 and Rs. 4 lakh in each of the months of October to December 2018.

The entity has not taken any specific borrowings to finance the construction of the building but has incurred finance costs on its general borrowings during the construction period. During the year, the entity had issued 9% debentures  with a face value of Rs. 30 lakh and  had an overdraft of Rs. 4 lakh, which increased to Rs. 8 lakh in December 2018. Interest was paid on the overdraft at 12% until 1st October, 2018 and then the rate was  increased to  15%.

Calculate the capitalization rate for computation  of  borrowing  cost  in  accordance  with Ind AS ‘Borrowing Cost’.

Solution –

Calculation of capitalization rate on borrowings other than specific borrowings

Nature of general borrowings	Period of outstanding Balance	Amount  of loan (Rs.)	Rate of interest p.a.	Weighted average amount of interest (Rs.)
	a	b	c	d = [(b x c) x (a/12)]
9% Debentures	12 months	30,00,000	9%	2,70,000
Bank overdraft	9 months	4,00,000	12%	36,000
	2 months	4,00,000	15%	10,000
	1 month	8,00,000	15%	10,000
		46,00,000		3,26,000

Weighted average cost of borrowings

= {30,00,000 x(12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12)}

= 34,33,334

Capitalisation rate

= (Weighted average amount of interest / Weighted average of general borrowings) x 100

= (3,26,000 / 34,33,334) x 100 = 9.50% p.a.

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