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3. As per AS 16 what will be the amount of interest to be capitalized and amount of interest to be charged to Profit & Loss A/c ?

Options

A` 12,500 interest to be capitalised and Profit & Loss A/c. ` 27,500 interest to be charged to Profit & Loss A/c
B` 12,500 interest to be capitalised and ` 20,833 interest to be charged to Profit & Loss A/c.
C` 19,167 interest to be capitalised and ` 20,833 interest to be charged to Profit & Loss A/c.
DWhole of `40,000 interest to be charged to Profit & Loss A/c.
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Correct Answer

✅ Option A — ` 12,500 interest to be capitalised and Profit & Loss A/c. ` 27,500 interest to be charged to Profit & Loss A/c

All Options:

  • A` 12,500 interest to be capitalised and Profit & Loss A/c. ` 27,500 interest to be charged to Profit & Loss A/c ✓
  • B` 12,500 interest to be capitalised and ` 20,833 interest to be charged to Profit & Loss A/c.
  • C` 19,167 interest to be capitalised and ` 20,833 interest to be charged to Profit & Loss A/c.
  • DWhole of `40,000 interest to be charged to Profit & Loss A/c.

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Detailed Solution & Explanation

To calculate the interest to be capitalized and interest charged to P&L under AS 16:
1. Total interest accrued on the loan of ‘ 6,00,000\displaystyle `\,6,00,000 @ 10% for 8 months is:
Total Interest=‘ 6,00,000×10%×812=‘ 40,000\text{Total Interest} = `\,6,00,000 \times 10\% \times \frac{8}{12} = `\,40,0002. Portion of interest capitalized on the qualifying asset (calculated on the cost of raw material used of ‘ 1,87,500\displaystyle `\,1,87,500):
Capitalized Interest=‘ 1,87,500×10%×812=‘ 12,500\text{Capitalized Interest} = `\,1,87,500 \times 10\% \times \frac{8}{12} = `\,12,5003. Interest charged to the Profit & Loss Account is:
Interest in P&L=‘ 40,000−‘ 12,500=‘ 27,500\text{Interest in P\&L} = `\,40,000 - `\,12,500 = `\,27,500
Hence, **Option A** is the correct answer.

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