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As 16 borrowing cost

ujjal phukan (article) (40 Points)

12 June 2014

a rail locomotiv engine at a cost of 10 crores purchased by taking a specified loan of 10 crs @ 10% interst. the engine took 9 months to get ready and another 2 months to reach at the factory. how much borrowing cost should be capitalized? Is the rail engine should be classi fied as vehicle?

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10 Replies

Tribhuvan Aditya Singh (Student as well as Self-employed) (3710 Points)
Replied 12 June 2014

borrowing cost for 11 months will be capitalised. rail engine should belong to a diff. block of asset but rate of dep. can be 30% as it is in case of vehicles.

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ujjal phukan (article) (40 Points)
Replied 12 June 2014

but is it a qualifying asset as it took only 9 months to get ready to use. since qualifying assets are those assets which take substantial period of time which is normally 12 months

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 12 June 2014

capitalise the interest for 11 months as put to use means it baecame usable for the assessee to use i.e. only after placing it at assessee factory.

regarding classification the nature of bisiness of assessee is important.

if for the purpose of business is used as plant and machinery than is should be classified under Plant and machinery.

if asset is used in business asset as in transport business than classify it under vehicles.

however i feel plane and machinery is more relevant.

Arif Ali (Apt Co Advisory) (1230 Points)
Replied 13 June 2014

since as per AS 16 there is not question on put to use. there is question of only ready to use, so interest should be capitalized for 9 months only. but under income tax act interest should be capitalised till the date of put to use.

Ravi Taori (Professor) (98 Points)
Replied 13 June 2014

AS 16 specifies qualifying asset should take 12 months get ready for use. But Accounting Standard Interpretation says tha criteria of 12 months is not rigid it depends on industry, how much time generally industry takes to complete such fixed assets. In given case you can capitalise intrest for 11months till date it is ready for commercial use. Further rail locomotive should be classified in plant and machinery as per schedull xiv of company act 1956.

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Rahul Panwar (nothing) (123 Points)
Replied 13 June 2014

if 2 month took for getting the into running condition thn incurred for such period shall be capitalised otherwise it would be debites to p&l a/c

ujjal phukan (article) (40 Points)
Replied 14 June 2014

On 1 /4 /2010 , Company got specific loan ofRs .1000000 @ 10 %interestforpurchase ofmachinery.but machine was not purchases at that time.Company invested the money @ 8%in fixed deposit.On 1 /7 /2012 compant give advance ofRs .250000 forpurchase ofqualifying asset.how much borrowing cost as peras 16 will be capitalized ?

Max Payne (employed) (2569 Points)
Replied 14 June 2014

Ujjal AS 16 requires that the interest to be capitalised should be NET after reducing income from temporary investments. So in such a case, reduce the interest received on FD from the borrowing cost to be capitalised.