ravi. (article trainee) (424 Points)
18 October 2010
Cost of Machinery on 1.4.2008 - Rs. 5 lakhs
Depreciation for 2 years - Rs. 2 lakhs
WDV on 1.4.2010 - Rs. 3 lakhs
Sale of Machinery on 1.4.2010 - Rs. 6 lakhs
Q. What will be the accounting implications as per Accounting Starndards ?
a. whether 3 lakhs will be credited to P&L ?
or
b. 2 lakhs will be credited to P&L and 1 lakh to Capital Reserve ?
Harpreet
(* * * * * *)
(1670 Points)
Replied 18 October 2010
Bank A/c / Cash A/c Dr 600000/-
To Machinery A/c Cr 300000/-
To Profit on sale of Machinery 300000/-
There is no depreciation will arise as you have sold this machinery on 01/04/2010, otherwise you have to book too.
ravi.
(article trainee)
(424 Points)
Replied 18 October 2010
but sir, what about the one lakh (6 lakhs - 5 lakhs) which is received over and above the Cost of Capital Asset ?
Will it to be credited to P & L A/c. or Capital Reserve ?
In my view, it is to be credited to Capital Reserve as one lakh (6 lakh - 5 lakh) is a Capital Receipt ?
Regards
ravi.
CA Sandeep Kumar
(Audit Assistant)
(804 Points)
Replied 19 October 2010
Hi, my observation is as under:
No doubt the surplus on sale of fixed asset is a capital profit and deserves to be treated as capital reserve. However provisions in AS-5 seem to suggest the profit/loss on asset disposal should be routed through p & l account, though disclosure has to be made. SImilarly provisions contained in AS-6 and AS-10 convey the same.
Capital reserve is also defined under part III of schedule VI of companies act as an amount which cannot be used for distribution of dividends. Therefore interpretation would be that only share premium, CRR, DRR and profits on reissue of forfieted shares are not available for dividends. Therefore capital profits representing surpluses realised on sale of assets are capable of being distributed as dividends. Thus profit on sale of assets may not form part of capital reserves.
Sources:
Accounting Standards
Auditing Study Material PCC- Page 6.11
Companies Act (bare act)
CAclubindia
