MAY 2010 - Final (New Course) Group 1 - Paper 1

Rainbow Limited borrowedan amount of Rs. 150 crores on 1.4.2009 forconstructionof boiler plant @ 11% p.a. The plant is expected to be completedin 4 years. The weighted average cost of capital is 13% p.a. The accountant of Rainbow Ltd., capitalisedinterestof Rs. 19.50 crores for the accountingperiod ending on 31.3.2010. Due to surplus fund out of Rs. 150 crores, anincome of Rs. 3.50 crores was earned and credited to profit and loss account.Comment on the above treatmentof accountantwith reference to relevantaccounting standard.