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MTPs QUESTIONS

Q6 (April 19)

ABC Ltd. has taken a loan of USD 20,000 on April 1, 20X1 for constructing a plant at an interest rate of 5%
per annum payable on an annual basis.
On April 1, 20X1, the exchange rate between the currencies i.e. USD vs Rupees was Rs. 45 per USD. The
exchange rate on the reporting date i.e. March 31, 20X2 is Rs. 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd. from State bank of India in local currency

at an interest rate of 11% per annum as on April 1, 20X1.
Compute the borrowing cost to be capitalized for the construction of the plant by ABC Ltd.
Solution

a) Interest on Foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000
Converted in Rs.: USD 1,000 x Rs. 48/USD = Rs. 48,000
Increase in liability due to change in exchange difference: USD 20,000 x (48 - 45) = Rs. 60,000

b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x Rs. 45/USD x 11% = Rs. 99,000
c) Difference between Interest on Foreign Currency borrowing and local Currency borrowing:
Rs. 99,000 - 48,000 = Rs. 51,000
Hence, out of Exchange loss of Rs. 60,000 on principal amount of foreign currency loan, exchange loss to the
extent of Rs. 51,000 is considered as borrowing costs.

Total borrowing cost to be capitalized is as under:
(a) Interest cost of borrowing Rs. 48,000
(b) Exchange difference to the extent considered to be an adjustment to Interest cost Rs. 51,000
Rs. 99,000
The exchange difference of Rs. 51,000 has been capitalized as borrowing cost and the remaining Rs. 9,000 will

be expensed off in the Statement of Profit and loss.

Q7 (October 20)- Same as Q.3.

On 1 April 2019, 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 asset. The building was completed
at the end of March, 2020, and during the period the following payments were made to the contractor:
Payment date Amount (Rs.)

1 April 2019 2,00,000
30 June 2019 6,00,000
31 December 2019 12,00,000
31 March 2020 2,00,000
Total 22,00,000

Entity A’s borrowings at its year end of 31 March 2020 were as follows:
a. 10%, 4-year note with simple interest payable annually, which relates specifically to the project; debt
outstanding on 31 March 2020 amounted to Rs. 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.
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