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Disclosure regarding inventory

Aakash (article) (27 Points)

28 June 2012

We have a business of sale & purchase of machinery. We get a free sample of machinery from japan on which we had paid custom duty, although the cost of machinery is nil, but we had added the custom duty in our cost of inventory, what should be the disclosure requirements in notes for accounting for showing the value of inventory or how we should disclose this transaction.

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4 Replies

CA Karan Lodhi (CA and B.com(hons.)) (879 Points)
Replied 28 June 2012

Akash you should take the cash cost to be nil but the amount of custom duty paid by you should be taken as the cost of machinery and charge/claim depreciation on this value.( i.e amount paid as custom). AS-10

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Karan Chaturvedi (Consultant - Taxation) (27 Points)
Replied 28 June 2012

As per AS-2, Items of inventory are valued at cost or net realisable value whichever is lower.

Cost would include cost of purchase, cost of conversion and others cost incurred to bring the asset to its present location i.e to the point of sale or point of consumption.

Therefore, the custom duty paid will be the cost incurred for bringing the machinery to the point of sale and assuming that net reasiable value in your case of machinery is higher, such machinery will be valued at cost.

As per As-2, the entity must disclose by way of proper Notes to Accounts,

1.) The accounting policies adopted in measuring the inventories i.e cost or NRV

2.) The cost formula i.e FIFO, Weighted Average Cost or Specific Identification Cost (in few cases)

3.) The total carrying amount of Inventory and it classification appropriate to the enterprises.