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10. Ace Limited borrowed ` 25 Lakhs from ABN Bank during the financial year 2023-24. Ace Limited used these funds to invest in Equity shares of Kay Limited. Kay Limited is implementing a new Project, so with these future prospects, Ace Limited invested ` 25 Lakhs in Kay Limited. As on 31st March, 2024, since the said project was not complete, the directors of Ace Limited capitalised the interest on loan amounting to ` 2 lakhs and thus added the amount of interest to the cost of Investments. Market value of these investments on 31st March, 2024 is ` 24 Lakhs. Identify the correct statement, considering the above facts as per AS 16:

Options

AInterest paid is acquisition charge, hence directors of Ace Limited correctly added the amount of interest in cost of investment.
BSince project is qualifying Asset, directors of Ace Limited correctly added the amount of interest in cost of investments. ADVANCED ACCOUNTING
CAce Limited invested in equity share which is not a qualifying asset, therefore directors are wrong to add the interest in cost of investments, rather it should be charged to profit and loss account.
DSince project is qualifying asset, directors of Ace Limited should capitalise the interest amount to market value of investments, rather than cost of investments. Case Scenario - III The following summary cash account has been extracted from the Nextspace Limited's accounting records: ` Cash Balance as on 01-04-2023 72,000 Cash Sales 15,56,000 Trade Receivable 7,40,000 Rent from Property held as investment 64,000 Income tax refund 25,000 Loan from Bank 5,00,000 Issue of Shares 2,50,000 Sale of Investment 49,500 31,84,500 Outflow of Cash Trade Payable 19,60,000 Office and Selling Exp. 1,20,000 Trade Commission 40,500 Underwriting Commission 25,000 Redemption of Preference shares 8,00,000 Brokerage on Sale of Investment 9,200 Interest on long term borrowings 85,600 Payment for Overheads 46,000 Purchases of Goodwill 50,000 (31,36,300) Balance as on 31-03-24 1,20,200 Based on the information given in above Case Scenario, answer the following
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Correct Answer

✅ Option C — Ace Limited invested in equity share which is not a qualifying asset, therefore directors are wrong to add the interest in cost of investments, rather it should be charged to profit and loss account.

All Options:

  • AInterest paid is acquisition charge, hence directors of Ace Limited correctly added the amount of interest in cost of investment.
  • BSince project is qualifying Asset, directors of Ace Limited correctly added the amount of interest in cost of investments. ADVANCED ACCOUNTING
  • CAce Limited invested in equity share which is not a qualifying asset, therefore directors are wrong to add the interest in cost of investments, rather it should be charged to profit and loss account. ✓
  • DSince project is qualifying asset, directors of Ace Limited should capitalise the interest amount to market value of investments, rather than cost of investments. Case Scenario - III The following summary cash account has been extracted from the Nextspace Limited's accounting records: ` Cash Balance as on 01-04-2023 72,000 Cash Sales 15,56,000 Trade Receivable 7,40,000 Rent from Property held as investment 64,000 Income tax refund 25,000 Loan from Bank 5,00,000 Issue of Shares 2,50,000 Sale of Investment 49,500 31,84,500 Outflow of Cash Trade Payable 19,60,000 Office and Selling Exp. 1,20,000 Trade Commission 40,500 Underwriting Commission 25,000 Redemption of Preference shares 8,00,000 Brokerage on Sale of Investment 9,200 Interest on long term borrowings 85,600 Payment for Overheads 46,000 Purchases of Goodwill 50,000 (31,36,300) Balance as on 31-03-24 1,20,200 Based on the information given in above Case Scenario, answer the following

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Detailed Solution & Explanation

As per AS 16 (Borrowing Costs):
1. Borrowing costs can only be capitalized if they are directly attributable to the acquisition, construction, or production of a qualifying asset.
2. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
3. Equity shares are not qualifying assets because they are ready for their intended use or sale immediately upon acquisition.
4. Therefore, the interest on the loan of ‘ 2\displaystyle `\,2 lakhs cannot be capitalized and must be charged to the Profit and Loss Account.
Hence, **Option C** is the correct answer.

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