Chapter 5: Asset Based Accounting Standards - Test 2: answer key

Question 1 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Sterling Capital Markets Ltd. is a diversified investment company. Its financial statements are prepared on 31 March 2027. The opening Balance Sheet at 1 April 2026 disclosed current investments of ₹35.00 lakh and long-term investments of ₹30.00 lakh. During the financial year, the investment committee reviewed its portfolio and classified investments according to the intention existing at the respective acquisition dates. The following current investments were held on 31 March 2027: Equity shares of Alpha Ltd., acquired for ₹16.00 lakh with brokerage of ₹0.40 lakh, had a fair value of ₹15.50 lakh; equity shares of Beta Ltd., acquired for ₹10.80 lakh including acquisition charges, had a fair value of ₹12.20 lakh; and listed debentures of Gamma Ltd., acquired for ₹6.00 lakh including acquisition charges, had a fair value of ₹5.70 lakh. The company's accounting policy is to value current investments individually at the lower of cost and fair value. The long-term portfolio included shares of Kappa Ltd. purchased for ₹12.00 lakh. Their market value declined to ₹8.50 lakh due to temporary market volatility, although the investee continued to report stable operating profits and positive cash flows. Another investment in Mu Ltd. had originally cost ₹10.00 lakh. Following a permanent regulatory restriction, declining net worth and recurring operating losses, its estimated recoverable value fell to ₹5.50 lakh. The management concluded that this decline was other than temporary. A separate long-term investment in Nu Ltd. had original cost of ₹9.00 lakh and carrying amount of ₹7.00 lakh after recognising an earlier provision for diminution. On 31 March 2027, the board approved its reclassification as a current investment. Its fair value on the transfer date was ₹8.10 lakh. The finance controller proposes valuing the entire portfolio on a combined basis and reversing all earlier investment provisions against unrelated gains. The audit committee requires the appropriate classification and carrying amounts under AS 13.

Which investment should be classified as a long-term investment despite being readily marketable?

1. Listed equity shares acquired with an intention to sell within ten months.
2. Treasury bills acquired with an intention to sell within six months.
3. Listed equity shares acquired with an intention to hold for eighteen months. (correct answer)
4. Listed debt securities acquired with an intention to sell within four months.

Answer: C — Listed equity shares acquired with an intention to hold for eighteen months.

Explanation. A current investment must be readily realisable and intended to be held for not more than one year from acquisition. The intention is assessed at the acquisition date. An investment intended for eighteen months is therefore long-term even when quoted and readily marketable. Option (a) and the other short-duration instruments satisfy the current-investment holding-period criterion. Marketability alone does not determine classification under AS 13.

Where it goes wrong. Classifying every quoted or readily marketable investment as current without considering the original holding intention.

Authority. AS 13 paras 3.2-3.3; AS 13 paras 7-8 and 26

Question 2 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the aggregate carrying amount of the three current-investment holdings on 31 March 2027, assuming individual valuation?

1. ₹32.00 lakh (correct answer)
2. ₹32.90 lakh
3. ₹34.40 lakh
4. ₹30.90 lakh

Answer: A — ₹32.00 lakh

Explanation. Alpha's total acquisition cost is ₹16.40 lakh and its carrying amount is ₹15.50 lakh. Beta is carried at the lower of ₹10.80 lakh and ₹12.20 lakh, namely ₹10.80 lakh. Gamma is carried at ₹5.70 lakh against cost of ₹6.00 lakh. Aggregate carrying amount is ₹15.50 + ₹10.80 + ₹5.70 = ₹32.00 lakh. The aggregate portfolio cannot be valued globally to offset unrelated gains and losses.

Where it goes wrong. Using the net fair value of the entire portfolio instead of testing each investment individually under the stated accounting policy.

Authority. AS 13 paras 14-16; AS 13 para 31

Question 3 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

What is the combined carrying amount of the long-term investments in Kappa Ltd. and Mu Ltd. at 31 March 2027?

1. ₹14.00 lakh
2. ₹17.00 lakh
3. ₹15.50 lakh
4. ₹17.50 lakh (correct answer)

Answer: D — ₹17.50 lakh

Explanation. Long-term investments are ordinarily carried at cost, subject to provision for a decline other than temporary. Kappa remains at ₹12.00 lakh because the decline is temporary and no permanent diminution is established. Mu must be written down from ₹10.00 lakh to ₹5.50 lakh because the evidence demonstrates a permanent decline. The aggregate amount is ₹17.50 lakh. Applying the market decline to Kappa as well would ignore the distinction between temporary and other-than-temporary diminution.

Where it goes wrong. Applying the lower-of-cost-and-fair-value rule applicable to current investments to long-term investments.

Authority. AS 13 paras 17-19; AS 13 para 32

Question 4 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

At what amount should the investment in Nu Ltd. be transferred to current investments on 31 March 2027?

1. ₹8.10 lakh
2. ₹7.00 lakh (correct answer)
3. ₹9.00 lakh
4. ₹8.55 lakh

Answer: B — ₹7.00 lakh

Explanation. When a long-term investment is reclassified as current, AS 13 para 23 requires transfer at the lower of original cost and carrying amount on the transfer date. Original cost is ₹9.00 lakh and existing carrying amount is ₹7.00 lakh. Therefore, the transfer value is ₹7.00 lakh. The fair value of ₹8.10 lakh does not replace the carrying amount for this particular transfer rule. Using fair value directly would disregard the previous diminution adjustment.

Where it goes wrong. Using the fair value on the transfer date instead of the lower of original cost and existing carrying amount.

Authority. AS 13 para 23

Question 5 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Aster Engineering Ltd. holds investments in listed securities as part of its treasury operations. Its Balance Sheet at 31 March 2026 disclosed current investments of ₹18.00 lakh. During the year ended 31 March 2027, the company purchased interest-bearing debentures and additional equity securities. The debentures were acquired with the intention of disposal within the next twelve months and therefore satisfy the company's current-investment classification criteria. On 1 December 2026, Aster purchased 2,000 listed 12% debentures of Zenith Ltd., each having a nominal value of ₹100. Interest is payable half-yearly on 31 March and 30 September. The quoted purchase price was ₹104 per debenture on a cum-interest basis. The preceding interest payment date was 30 September 2026. Thus, the quoted consideration included interest accrued for October and November 2026. Brokerage was charged at 1% on the clean investment consideration, excluding accrued interest. The purchase was settled immediately through the company's bank account. On 31 March 2027, Zenith Ltd. paid the entire half-yearly interest due on these debentures. The treasury accountant credited the whole receipt to investment income, without separating the interest relating to the period before acquisition. The company also received its regular dividend on equity shares purchased earlier during the financial year. At the reporting date, the market quotation of the Zenith debentures was ₹101.50 per ₹100 nominal value. A separate holding of current equity shares had an acquisition cost of ₹1.00 lakh and a fair value of ₹1.20 lakh. Both investment categories were readily realisable. The company proposes to combine all securities into one overall portfolio for valuation, arguing that the higher equity market value compensates for the decline in debenture values. The draft Balance Sheet currently reports the debentures at their full acquisition cost and recognises the entire coupon receipt as income. The statutory auditor has requested separate calculations of investment cost, pre-acquisition interest, subsequent interest income and year-end carrying amount.

What is the cost of the 2,000 debentures purchased by Aster Engineering Ltd. on 1 December 2026, excluding the accrued interest component?

1. ₹2,08,080
2. ₹2,04,000
3. ₹2,10,040
4. ₹2,06,040 (correct answer)

Answer: D — ₹2,06,040

Explanation. The cum-interest quotation of ₹104 includes accrued interest for two months. Interest per debenture is ₹100 × 12% × 2/12 = ₹2. Therefore, the clean price is ₹102 per debenture, giving ₹2,04,000 for 2,000 debentures. Brokerage of 1% on clean consideration is ₹2,040. Total investment cost is ₹2,06,040. The separate accrued interest of ₹4,000 is not an acquisition cost of the investment.

Where it goes wrong. Including accrued pre-acquisition interest in investment cost or calculating brokerage on the cum-interest consideration.

Authority. AS 13 paras 9 and 12; AS 13 para 28

Question 6 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

How should the coupon interest received on 31 March 2027 be recognised between investment cost recovery and investment income?

1. ₹12,000 as investment income without any cost adjustment.
2. ₹4,000 as income and ₹8,000 as recovery of investment cost.
3. ₹4,000 as recovery of cost and ₹8,000 as investment income. (correct answer)
4. ₹6,000 as income and ₹6,000 as recovery of investment cost.

Answer: C — ₹4,000 as recovery of cost and ₹8,000 as investment income.

Explanation. The six-month coupon is ₹2,000 × ₹100 × 12% × 6/12 = ₹12,000. Two months' interest of ₹4,000 accrued before acquisition and was included in the cum-interest purchase price. Its receipt is therefore a recovery of investment cost. The remaining four months' interest of ₹8,000 relates to the post-acquisition holding period and is recognised as income. Crediting the entire ₹12,000 to income overstates the return earned after acquisition.

Where it goes wrong. Recognising the whole coupon received as current-period income without separating pre-acquisition interest.

Authority. AS 13 para 12

Question 7 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

What is the carrying amount of the Zenith Ltd. debentures on 31 March 2027?

1. ₹2.03 lakh (correct answer)
2. ₹2.06 lakh
3. ₹2.10 lakh
4. ₹2.04 lakh

Answer: A — ₹2.03 lakh

Explanation. The debenture investment cost is ₹2,06,040, including brokerage but excluding accrued interest. The market value at the reporting date is ₹2,000 × ₹101.50 = ₹2,03,000. Since these are current investments, the lower of cost and fair value is recognised. Therefore, the carrying amount is ₹2.03 lakh. Carrying them at ₹2.06 lakh would ignore the required year-end fair-value comparison under AS 13.

Where it goes wrong. Retaining acquisition cost for current investments even when the reporting-date fair value is lower.

Authority. AS 13 paras 14-16; AS 13 para 31

Question 8 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the total carrying amount of the debenture and equity current-investment holdings on 31 March 2027?

1. ₹3.2604 lakh
2. ₹3.0300 lakh (correct answer)
3. ₹3.2300 lakh
4. ₹2.9600 lakh

Answer: B — ₹3.0300 lakh

Explanation. The debentures are carried at ₹2.03 lakh, being their fair value below cost. The equity shares are carried at ₹1.00 lakh, being cost below their fair value of ₹1.20 lakh. The total is ₹3.03 lakh. Overall valuation of ₹3.2604 lakh would use the aggregate cost because aggregate fair value exceeds it, thereby concealing the decline in debenture value. AS 13 does not permit global valuation to offset unrelated investment categories.

Where it goes wrong. Allowing an unrealised gain on equity shares to conceal an unrealised loss on debentures through global portfolio valuation.

Authority. AS 13 paras 14-16; AS 13 para 31

Question 9 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. Horizon Infrastructure Ltd. holds strategic investments in listed companies and investment properties. Its Balance Sheet at 1 April 2026 disclosed long-term equity investments of ₹22.00 lakh and current investments of ₹14.00 lakh. The company acquired 8,000 equity shares of Pioneer Ltd. in an earlier financial year for an aggregate carrying cost of ₹12.00 lakh, inclusive of brokerage and other acquisition charges. These shares were classified as long-term investments. On 1 July 2026, Pioneer Ltd. announced a bonus issue of one equity share for every four shares held. Subsequently, on 1 October 2026, it announced a rights issue of one share for every five shares held after the bonus issue. The rights shares were offered at ₹90 each. Horizon exercised 60% of its entitlement and sold the remaining rights entitlements in the market for ₹12 each. The shares subscribed under the rights issue were credited to the company's demat account during October 2026. On 1 March 2027, Horizon sold 4,000 shares of Pioneer Ltd. at ₹125 per share. Brokerage on the sale was 1%. The company consistently applies the average carrying amount method when disposing of part of an individual investment holding. No further purchases, bonus issues or rights issues occurred after the above transactions. The company also held an investment in Prism Ltd. classified as current, with original cost ₹6.00 lakh and fair value ₹5.40 lakh on 31 March 2027. The board approved its reclassification to long-term on that date. A separate long-term investment in Orion Ltd. had original cost ₹8.00 lakh and carrying amount ₹6.50 lakh after an earlier provision for diminution; it was approved for reclassification as current. The fair value of Orion Ltd. shares on the transfer date was ₹7.20 lakh. Management intends to report both transfers at original cost without considering the existing valuation adjustments.

How many bonus shares did Horizon Infrastructure Ltd. receive on 1 July 2026?

1. 1,600 shares
2. 1,800 shares
3. 2,000 shares (correct answer)
4. 2,400 shares

Answer: C — 2,000 shares

Explanation. The company held 8,000 original shares and received one bonus share for every four shares held. Bonus entitlement is therefore 8,000 ÷ 4 = 2,000 shares. These bonus shares do not involve an additional cash acquisition cost; the existing investment cost is spread over the enlarged holding for subsequent average-cost calculations. Using the later rights entitlement as the basis for calculating the bonus issue would incorrectly include shares not held on the bonus record date.

Where it goes wrong. Calculating bonus entitlement on shares acquired subsequently through the rights issue.

Authority. AS 13 paras 14-15; ICAI Study Material, Chapter 5, Unit 3, Illustration 6

Question 10 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the average carrying cost per Pioneer Ltd. share immediately after the rights shares subscribed for have been added to the original and bonus holdings?

1. ₹120.00
2. ₹108.00
3. ₹130.80
4. ₹116.79 (correct answer)

Answer: D — ₹116.79

Explanation. Original investment cost remains ₹12,00,000. Bonus shares add 2,000 shares without additional cost. Rights entitlement is 10,000 ÷ 5 = 2,000 shares; 60%, or 1,200, are subscribed for at ₹90, adding ₹1,08,000 to cost. Total cost is ₹13,08,000 and total shares are 11,200. Average cost is ₹13,08,000 ÷ 11,200 = ₹116.7857, or ₹116.79 per share. Sold rights proceeds are not added to the subscribed-share cost.

Where it goes wrong. Adding a cost to bonus shares or including the proceeds from rights sold in the cost of subscribed rights shares.

Authority. AS 13 para 13

Question 11 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

What is the gain on the sale of 4,000 Pioneer Ltd. shares on 1 March 2027, using the average carrying amount method?

1. ₹38,125
2. ₹27,857 (correct answer)
3. ₹32,000
4. ₹22,857

Answer: B — ₹27,857

Explanation. Net sale proceeds are 4,000 × ₹125 less 1% brokerage, giving ₹4,95,000. The average carrying cost is ₹13,08,000 ÷ 11,200 = ₹116.7857 per share. The cost allocated to the 4,000 shares sold is ₹4,67,142.86. Gain on disposal is ₹4,95,000 − ₹4,67,142.86 = ₹27,857.14. Using original cost without the rights subscription or ignoring brokerage would produce an incorrect disposal result.

Where it goes wrong. Using the original holding cost rather than the average carrying amount of the enlarged holding or ignoring disposal expenses.

Authority. AS 13 paras 21-22

Question 12 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

At what amounts should the investments in Prism Ltd. and Orion Ltd. be transferred on their respective reclassification dates?

1. Prism ₹5.40 lakh; Orion ₹6.50 lakh. (correct answer)
2. Prism ₹6.00 lakh; Orion ₹7.20 lakh.
3. Prism ₹5.40 lakh; Orion ₹7.20 lakh.
4. Prism ₹6.00 lakh; Orion ₹6.50 lakh.

Answer: A — Prism ₹5.40 lakh; Orion ₹6.50 lakh.

Explanation. A transfer from current to long-term is made at the lower of cost and fair value: Prism therefore transfers at ₹5.40 lakh. A transfer from long-term to current is made at the lower of cost and carrying amount: Orion therefore transfers at ₹6.50 lakh. The two transfers follow different rules. Applying the same lower-of-cost-and-fair-value test to both transactions would incorrectly increase Orion's carrying amount.

Where it goes wrong. Reversing or interchanging the measurement rules for transfers from current to long-term and long-term to current.

Authority. AS 13 paras 23-24

Question 13 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Radian Ltd. acquires a long-term investment in another company by issuing 2,000 of its own equity shares. The nominal value of each share issued is ₹10, but its fair value on the acquisition date is ₹18. Radian also incurs brokerage of ₹4,000 and stamp duty of ₹1,000. What is the acquisition cost of the investment?

Radian Ltd. acquires a long-term investment in another company by issuing 2,000 of its own equity shares. The nominal value of each share issued is ₹10, but its fair value on the acquisition date is ₹18. Radian also incurs brokerage of ₹4,000 and stamp duty of ₹1,000. What is the acquisition cost of the investment?

1. ₹36,000
2. ₹41,000 (correct answer)
3. ₹25,000
4. ₹45,000

Answer: B — ₹41,000

Explanation. The investment acquired through issue of shares is measured using the fair value of the securities issued, not their nominal value. Accordingly, consideration is 2,000 × ₹18 = ₹36,000. Brokerage of ₹4,000 and stamp duty of ₹1,000 are additional acquisition charges. Total investment cost is ₹41,000. Using the ₹10 nominal value would understate the fair value of the consideration issued and consequently understate investment cost.

Where it goes wrong. Using the nominal value instead of the fair value of shares issued as acquisition consideration.

Authority. AS 13 paras 9-10; AS 13 paras 28-29

Question 14 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A current investment was acquired for ₹4.80 lakh. At the previous reporting date, its fair value was ₹4.10 lakh and the fall was recognised in profit or loss. At the current reporting date, its fair value has recovered to ₹5.00 lakh. What is the appropriate carrying amount and reversal recognised?

A current investment was acquired for ₹4.80 lakh. At the previous reporting date, its fair value was ₹4.10 lakh and the fall was recognised in profit or loss. At the current reporting date, its fair value has recovered to ₹5.00 lakh. What is the appropriate carrying amount and reversal recognised?

1. ₹5.00 lakh carrying amount and ₹0.90 lakh reversal.
2. ₹4.10 lakh carrying amount and no reversal.
3. ₹4.80 lakh carrying amount and ₹0.70 lakh reversal. (correct answer)
4. ₹4.80 lakh carrying amount and ₹0.90 lakh reversal.

Answer: C — ₹4.80 lakh carrying amount and ₹0.70 lakh reversal.

Explanation. The previous write-down was ₹4.80 − ₹4.10 = ₹0.70 lakh. Current investments are carried at the lower of cost and fair value; therefore the asset is now carried at ₹4.80 lakh, not ₹5.00 lakh. The ₹0.70 lakh previous reduction is reversed through profit or loss. The additional ₹0.20 lakh appreciation above original cost is not recognised. AS 13 requires reversal of the earlier reduction but does not permit recognition above cost.

Where it goes wrong. Recognising appreciation above original cost when reversing a previous current-investment write-down.

Authority. AS 13 paras 14-16; AS 13 para 33

Question 15 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A long-term investment originally costing ₹12.00 lakh was written down to ₹7.50 lakh after a decline other than temporary. In the subsequent year, the circumstances causing the decline substantially reverse and the investment's estimated value rises to ₹10.20 lakh. What reversal should be recognised?

A long-term investment originally costing ₹12.00 lakh was written down to ₹7.50 lakh after a decline other than temporary. In the subsequent year, the circumstances causing the decline substantially reverse and the investment's estimated value rises to ₹10.20 lakh. What reversal should be recognised?

1. ₹4.50 lakh reversal.
2. ₹1.80 lakh reversal.
3. ₹0.00 lakh reversal.
4. ₹2.70 lakh reversal. (correct answer)

Answer: D — ₹2.70 lakh reversal.

Explanation. The previous impairment provision reduced the carrying amount by ₹12.00 − ₹7.50 = ₹4.50 lakh. The investment's value has now risen to ₹10.20 lakh and the reasons for the earlier diminution have substantially reversed. Accordingly, the provision is reversed by ₹10.20 − ₹7.50 = ₹2.70 lakh. The carrying amount becomes ₹10.20 lakh, still below original cost. Reversing the entire ₹4.50 lakh would incorrectly carry the investment above the revised value.

Where it goes wrong. Reversing the entire earlier provision instead of restricting the reversal to the revised recoverable value.

Authority. AS 13 paras 17-19; AS 13 para 33

Question 16 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. An investor holds 25,000 shares of a company with an aggregate carrying amount of ₹28.00 lakh. It disposes of 7,500 shares at ₹125 each and pays brokerage at 1%. What is the gain on disposal using the average carrying amount method?

An investor holds 25,000 shares of a company with an aggregate carrying amount of ₹28.00 lakh. It disposes of 7,500 shares at ₹125 each and pays brokerage at 1%. What is the gain on disposal using the average carrying amount method?

1. ₹0.88125 lakh (correct answer)
2. ₹1.27500 lakh
3. ₹0.97500 lakh
4. ₹0.75000 lakh

Answer: A — ₹0.88125 lakh

Explanation. Average cost per share is ₹28,00,000 ÷ 25,000 = ₹112. Cost of the shares sold is 7,500 × ₹112 = ₹8,40,000. Net disposal proceeds are 7,500 × ₹125 = ₹9,37,500 less brokerage of ₹9,375, giving ₹9,28,125. Gain is ₹9,28,125 − ₹8,40,000 = ₹88,125, or ₹0.88125 lakh. Comparing carrying amount with gross sale proceeds would ignore the disposal expenses.

Where it goes wrong. Allocating cost using a specific purchase lot rather than average carrying amount and failing to deduct brokerage.

Authority. AS 13 paras 21-22

Question 17 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A company purchases a warehouse building for ₹28 lakh and acquires compulsory membership shares in a cooperative society for ₹2 lakh. The shares are directly related to the legal right to hold the property. The warehouse is let to an unrelated enterprise and is not occupied for the investor's own operations. What is the appropriate accounting treatment?

A company purchases a warehouse building for ₹28 lakh and acquires compulsory membership shares in a cooperative society for ₹2 lakh. The shares are directly related to the legal right to hold the property. The warehouse is let to an unrelated enterprise and is not occupied for the investor's own operations. What is the appropriate accounting treatment?

1. Recognise a current investment of ₹28 lakh at fair value.
2. Recognise PPE of ₹30 lakh under the revaluation model.
3. Recognise a long-term investment property of ₹30 lakh under the cost model. (correct answer)
4. Recognise a long-term investment property of ₹28 lakh under the cost model.

Answer: C — Recognise a long-term investment property of ₹30 lakh under the cost model.

Explanation. The building is not occupied substantially for use in the investor's operations and therefore qualifies as investment property. The directly related cooperative-society shares are added to its carrying amount, resulting in ₹28 lakh + ₹2 lakh = ₹30 lakh. AS 13 requires investment properties to be accounted for using the cost model prescribed in AS 10. Treating the building as owner-occupied PPE or excluding the compulsory membership shares would be inappropriate.

Where it goes wrong. Treating investment property as owner-occupied PPE or excluding directly related cooperative-society shares from its cost.

Authority. AS 13 paras 3.4 and 20; AS 13 para 30; AS 10 para 30

Question 18 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. Which of the following assets would qualify for borrowing-cost capitalisation under AS 16, assuming the stated preparation periods are supported by the relevant circumstances?

Which of the following assets would qualify for borrowing-cost capitalisation under AS 16, assuming the stated preparation periods are supported by the relevant circumstances?

1. Listed equity shares purchased in the stock market and ready for investment immediately.
2. Standard inventory manufactured repeatedly and made saleable within three weeks.
3. A completed warehouse acquired ready for immediate rental to tenants.
4. A manufacturing plant requiring fourteen months of construction and testing before operation. (correct answer)

Answer: D — A manufacturing plant requiring fourteen months of construction and testing before operation.

Explanation. A qualifying asset necessarily takes a substantial period to become ready for intended use or sale. The fourteen-month manufacturing plant satisfies the ordinary twelve-month benchmark. Securities are ready for use upon acquisition, standard inventories manufactured repetitively over a short period are excluded, and the completed warehouse is already ready for its intended use. AS 16 para 5 specifically identifies manufacturing plants as qualifying assets and excludes investments that are ready for use when acquired.

Where it goes wrong. Assuming every investment or inventory item automatically qualifies for borrowing-cost capitalisation.

Authority. AS 16 paras 3.2 and 5

Question 19 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company borrows ₹80 lakh specifically at 10% per annum on 1 July 2026 for construction of a qualifying asset. Active development commences on the same date and continues until 31 March 2027. The company temporarily invests the unutilised portion of the specific borrowing and earns ₹0.45 lakh during this period. What borrowing cost should be capitalised?

A company borrows ₹80 lakh specifically at 10% per annum on 1 July 2026 for construction of a qualifying asset. Active development commences on the same date and continues until 31 March 2027. The company temporarily invests the unutilised portion of the specific borrowing and earns ₹0.45 lakh during this period. What borrowing cost should be capitalised?

1. ₹5.55 lakh (correct answer)
2. ₹6.00 lakh
3. ₹8.00 lakh
4. ₹7.55 lakh

Answer: A — ₹5.55 lakh

Explanation. The eligible capitalisation period is nine months, from 1 July 2026 to 31 March 2027. Actual interest is ₹80 lakh × 10% × 9/12 = ₹6.00 lakh. Under AS 16 paras 10-11, income earned from temporary investment of specific borrowings is deducted. Eligible borrowing cost is therefore ₹6.00 − ₹0.45 = ₹5.55 lakh. Capitalising the full interest without deducting temporary investment income would overstate the asset cost.

Where it goes wrong. Ignoring income earned from temporarily investing unutilised specific borrowings.

Authority. AS 16 paras 6-8; AS 16 paras 10-11

Question 20 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A company has the following general borrowings outstanding during the financial year: ₹60 lakh at 10% for the entire year; ₹90 lakh at 12% for the entire year; and ₹50 lakh at 9% from 1 October 2026. What is the weighted-average capitalisation rate for general borrowings, rounded to two decimal places?

A company has the following general borrowings outstanding during the financial year: ₹60 lakh at 10% for the entire year; ₹90 lakh at 12% for the entire year; and ₹50 lakh at 9% from 1 October 2026. What is the weighted-average capitalisation rate for general borrowings, rounded to two decimal places?

1. 10.00%
2. 10.89% (correct answer)
3. 11.50%
4. 12.00%

Answer: B — 10.89%

Explanation. Borrowing costs are ₹6.00 lakh on ₹60 lakh, ₹10.80 lakh on ₹90 lakh and ₹2.25 lakh on ₹50 lakh for six months. Total borrowing cost is ₹19.05 lakh. Weighted-average outstanding borrowings are ₹60 + ₹90 + ₹25 = ₹175 lakh. Capitalisation rate is ₹19.05 ÷ ₹175 × 100 = 10.8857%, rounded to 10.89%. Specific borrowings, if any, must be excluded from this general-borrowing calculation.

Where it goes wrong. Including the full amount of a borrowing introduced partway through the year instead of its time-weighted outstanding balance.

Authority. AS 16 para 12

Question 21 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A qualifying asset is financed through general borrowings carrying a capitalisation rate of 10.89%. The following expenditures were incurred: ₹40 lakh on 1 April 2026, ₹60 lakh on 1 October 2026 and ₹50 lakh on 1 January 2027. The asset remains under active construction throughout the year and is not completed by 31 March 2027. What amount of borrowing cost is eligible for capitalisation?

A qualifying asset is financed through general borrowings carrying a capitalisation rate of 10.89%. The following expenditures were incurred: ₹40 lakh on 1 April 2026, ₹60 lakh on 1 October 2026 and ₹50 lakh on 1 January 2027. The asset remains under active construction throughout the year and is not completed by 31 March 2027. What amount of borrowing cost is eligible for capitalisation?

1. ₹10.89 lakh
2. ₹9.50 lakh
3. ₹8.98 lakh (correct answer)
4. ₹7.50 lakh

Answer: C — ₹8.98 lakh

Explanation. Time-weighted expenditure is ₹40 lakh × 12/12 + ₹60 lakh × 6/12 + ₹50 lakh × 3/12 = ₹82.50 lakh. Applying the general borrowing capitalisation rate gives ₹82.50 lakh × 10.89% = ₹8.98425 lakh, rounded to ₹8.98 lakh. Expenditure is weighted according to the period outstanding in construction. Applying the rate to the entire ₹150 lakh expenditure would fail to recognise the timing of individual cash outflows.

Where it goes wrong. Applying the general borrowing capitalisation rate to total expenditure without time-weighting expenditure incurred during the year.

Authority. AS 16 paras 12 and 15

Question 22 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A company obtains a construction loan and incurs borrowing costs from 1 May 2026. Technical work necessary to obtain construction permissions begins on 15 May 2026. Actual expenditure on construction begins on 1 June 2026. Assuming all other requirements are met, from which date should capitalisation commence?

A company obtains a construction loan and incurs borrowing costs from 1 May 2026. Technical work necessary to obtain construction permissions begins on 15 May 2026. Actual expenditure on construction begins on 1 June 2026. Assuming all other requirements are met, from which date should capitalisation commence?

1. 1 May 2026
2. 15 May 2026
3. 1 July 2026
4. 1 June 2026 (correct answer)

Answer: D — 1 June 2026

Explanation. AS 16 para 14 requires three conditions simultaneously: expenditure on the qualifying asset must be incurred, borrowing costs must be incurred, and necessary preparation activities must be in progress. Borrowing costs begin on 1 May, technical preparation begins on 15 May and expenditure begins on 1 June. All three conditions are therefore satisfied for the first time on 1 June 2026. Earlier loan interest cannot be capitalised merely because the loan was raised.

Where it goes wrong. Commencing capitalisation on the borrowing date without checking whether qualifying-asset expenditure has also started.

Authority. AS 16 paras 14-16

Question 23 · 2 marks · Chapter 5: Asset Based Accounting Standards · medium

Scenario. A company incurs borrowing costs of ₹0.40 lakh per month for a qualifying asset under construction from 1 June 2026 to 31 March 2027. Active development is interrupted by an extended labour strike during July and August 2026. Construction activities continue during all other months. What amount should be capitalised and what amount should be expensed?

A company incurs borrowing costs of ₹0.40 lakh per month for a qualifying asset under construction from 1 June 2026 to 31 March 2027. Active development is interrupted by an extended labour strike during July and August 2026. Construction activities continue during all other months. What amount should be capitalised and what amount should be expensed?

1. Capitalise ₹3.20 lakh; expense ₹0.80 lakh. (correct answer)
2. Capitalise ₹4.00 lakh; expense nil.
3. Capitalise ₹2.80 lakh; expense ₹1.20 lakh.
4. Capitalise ₹3.60 lakh; expense ₹0.40 lakh.

Answer: A — Capitalise ₹3.20 lakh; expense ₹0.80 lakh.

Explanation. The total period is ten months, giving total borrowing costs of ₹4.00 lakh. Active development is interrupted for two months due to an extended labour strike. Capitalisation is suspended for those two months under AS 16 para 17. Eligible capitalisation is therefore eight months × ₹0.40 lakh = ₹3.20 lakh. The remaining ₹0.80 lakh is expensed. A normal temporary construction delay inherent in the development process would have a different treatment.

Where it goes wrong. Capitalising borrowing costs during an extended period in which active development is interrupted.

Authority. AS 16 paras 17-18

Question 24 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company constructs a specialised production building. Physical construction is substantially complete and the building is capable of operating in its intended manner on 30 November 2026. Only minor decoration and routine administrative documentation remain, which are completed on 31 January 2027. Borrowing costs continue throughout this period. Until which date should borrowing costs be capitalised?

A company constructs a specialised production building. Physical construction is substantially complete and the building is capable of operating in its intended manner on 30 November 2026. Only minor decoration and routine administrative documentation remain, which are completed on 31 January 2027. Borrowing costs continue throughout this period. Until which date should borrowing costs be capitalised?

1. 31 January 2027
2. 30 November 2026 (correct answer)
3. 31 December 2026
4. 31 March 2027

Answer: B — 30 November 2026

Explanation. Capitalisation ceases when substantially all activities necessary to prepare the qualifying asset for its intended use are complete. Physical construction was substantially complete on 30 November 2026 and the building was capable of operating as intended. Minor decoration and routine administrative work do not justify continued capitalisation. Therefore, borrowing costs after 30 November are expensed. Deferring cessation until 31 January would improperly capitalise financing costs incurred after the asset became ready for its intended use.

Where it goes wrong. Continuing capitalisation until every minor modification or administrative formality is completed.

Authority. Accounting Standards / Companies Act 2013

Question 25 · 2 marks · Chapter 5: Asset Based Accounting Standards · hard

Scenario. A company constructs a commercial complex comprising three separate office blocks. Each block is capable of being occupied and generating rental income independently. Block A is substantially complete and ready for occupation on 31 December 2026, whereas Blocks B and C remain under construction until 31 May 2027. How should borrowing-cost capitalisation be treated?

A company constructs a commercial complex comprising three separate office blocks. Each block is capable of being occupied and generating rental income independently. Block A is substantially complete and ready for occupation on 31 December 2026, whereas Blocks B and C remain under construction until 31 May 2027. How should borrowing-cost capitalisation be treated?

1. Continue capitalisation for all three blocks until 31 May 2027.
2. Cease capitalisation for all blocks on 31 December 2026.
3. Cease capitalisation for Block A on 31 December 2026 and continue for Blocks B and C until 31 May 2027. (correct answer)
4. Cease capitalisation for Block A on 31 May 2027 and continue for Blocks B and C.

Answer: C — Cease capitalisation for Block A on 31 December 2026 and continue for Blocks B and C until 31 May 2027.

Explanation. Where a qualifying asset is completed in independently usable parts, capitalisation ceases separately for each part when substantially all activities necessary to prepare that part for use are complete. Block A is independently ready on 31 December 2026, so its borrowing costs cease then. Blocks B and C continue to qualify until their readiness on 31 May 2027. Treating the entire complex as a single indivisible asset would ignore the explicit phased-completion requirements of AS 16 para 21.

Where it goes wrong. Continuing capitalisation on an independently usable completed phase merely because other phases remain under construction.

Authority. AS 16 paras 19-22