CA. Ashutosh Dadhich (in service) (97 Points)
24 March 2010We bought a software for Rs. 25 Lc. and paid Rs. 3 Lc. for warranty at the time of purchase of software.
my query is that wether we can capitalised warranty charges or not ????
My contention is that coz we have paid warranty charges at the time of purchase of Asset so its an incillary cost of fixed asset hence, we can capitalised.
Pl. suggest correct treatment and why (logic) ???
Amir
(Learner)
(4016 Points)
Replied 24 March 2010
Dear Sir,
At the outset only, let me tell u the thread that demarcates between Capital and Revenue Expenditures is very thin in some situations........One has to apply his/her own judgement............
Now coming to ur case - There are certain NON MUTUALLY EXCLUSIVE (one may stop u but the other can permit u) indicators (BUT NOT CONCLUSIVE) from which u can decide the nature of this warranty charges -
1) The period covered under warranty - If exceeds 1 year then can be considered as Capital but again it can also be considered as deffered revenue/prepaid expense. Plus even if it is of 1 year stil it can be considered as Capital depending upon the (2) point.
2) Whether the payment made on account of warranty was ESSENTIAL (it includes essential from the prudence angle and not necessarily arising from the contract with the vendor) to bring the asset into acquisition/existence - If yes then it can be considered as Capital Item
3) The fact which u have mentioned that Payment is made at the time of acquisition - It also indicates towards Capital only.
To conclude I feel it is a capital item only..................
CA. Ashutosh Dadhich
(in service)
(97 Points)
Replied 24 March 2010
Thank u so much Aamir.
You are very correct that there is very thin diff. between capital exp. and revenue exp. and being as an employee of Co. I needed some strong reason to capitalise this exp. and offcourse, with some logical support from my CA family members.
Thanx again for your answer.
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