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As-10 clarification

15 March 2016

A company Purchased plant and machinery in the year 2008-2009 for rupees 45 Lakh. A balance of rupees 5 Lakh still payable to the suppliers for the same. The supplier waived off the balance amount during the financial year 2011-12. The company treated it as income and credited to P&L account during 201-12. Is the accounting treatment of the company correct?

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3 Replies

Amit M Bafna (74 Points)
Replied 15 March 2016

The accounting treatment given is correct. But it is not taxable under income tax has it is capital profit and not trading profit.

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Abhey Gupta (Student CA IPC / IPCC) (64 Points)
Replied 17 March 2016

The amount equal to depreciation on Rs.5,00,000 claimed will be credited to P/L account and for balance following entry:

Creditors

To Machinery

It is the most logical treatment

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Saliq Ansari (CA_Final Student) (885 Points)
Replied 18 March 2016

I do not Agree with the Treatment provided by Mr. Abhey Gupta,

The query posted above in fact is not at all related to the AS - 10 but it shall be dealt with under AS - 5

As per AS - 10 Accounting for Fixed Assets

Fixed Assets should be valued either at the historical price or Revalued price, though if the assets are valued at revalued price then such revalued price should not exceed its Recoverable price.

As per AS 28 Impairment of Assets;

Recoverable amount is Higher of

Net Selling Price of Asset OR
Value in Use of Asset.

The fact that the supplier of Machinery waived off the Amount Outstanding towards him will not result in decrease in Either Net Selling Price of Asset or Value in Use of Asset .

Hence Reducing the Value of Machinery by Rs. 500000/- is not the Correct treatment.

The Correct treatment of the same should be as per AS 5 Net Profit or Loss for the Period, Prior period items & Changes in Accounting Policies,

As per AS 5, Any item of income or expense which is incurred due to activities which are not ordinary business activity are termed as Extra Ordinary Items.

Hence this should be treated as Extra ordinary items and should be shown in Statement of P&L as Extra Ordinary Item.

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