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Asset Recognition

jassi (ACA) (181 Points)

07 May 2010

Hi........

A Co. has acquired land worth 5 crores from a state development Corp. .

The consideration is payable in 5 years. Only 1 crore has paid till 31 march, 2010.

Following treatment has been done -

Land dr. 50000000

To Bank 10000000

To state Corp. 40000000 ( Long term Liability recognised )

Questions.

1) Is this treatment correct ?

2) This 5 crore contains some interest element . Whether it can be capitalised ?

thanks

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2 Replies

shakuntala chhangani (FCA Course co-ordinator WIRC coaching centre) (2525 Points)
Replied 08 May 2010

My dear, the first thing u mentioned is that "land WORTH Rs. 5 crores was acquired", it means that the cost of land is Rs. 5 crores. so ideally it should not include interest element. Even if we assume that it includes interest,the whole amt. of interest can not be capitalised. It is only interest upto the date land is ready for commercial use that can be capitalised and the balance interest will be expensed on accrual basis.

Regards, CA Shakuntala Chhangani

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jassi (ACA) (181 Points)
Replied 08 May 2010

Originally posted by : shakuntala chhangani
	My dear, the first thing u mentioned is that "land WORTH Rs. 5 crores was acquired", it means that the cost of land is Rs. 5 crores. so ideally it should not include interest element. Even if we assume that it includes interest,the whole amt. of interest can not be capitalised. It is only interest upto the date land is ready for commercial use that can be capitalised and the balance interest will be expensed on accrual basis. Regards, CA Shakuntala Chhangani

Hi ... thanks for your post. In the above case, the corp. has framed 6 installments whose total becomes 5 crores but if 100 % is paid on the spot then it will cost 4.28 crores. So the interest element is included in cost itself ? Since land is not a qualifying asset how can we capitalise this interest amount ? Rather if any loan will be taken for building it would be allowed for Capitalization!!!! What you say ?