Capitalisation of pre-operative expenses on machinery

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vaishali (Querist)
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06 April 2015 Case 1: New company started its business in Year 1991 & purchased first machinery of Rs.50 lacs in year 1991 (production started in 1991). Loan of Rs.50 lacs taken & tenure of loan is 10 years & total Interest of 10 yrs will be Rs.30 lacs (approx) i.e. say 3.50 lacs per year.

In such case Machinery capitalized in 1991 = Rs.50 lacs & how much pre-operative expesnses (Int on loan ) can capitalize? 3.50 lacs or 30 lacs.

Pl explain.

Case 2: Existing company & purchased machinery of Rs.50 lacs in year 1991 (production started in 1991). Loan of Rs.50 lacs taken & tenure of loan is 10 years & total Interest of 10 yrs will be Rs.30 lacs (approx) i.e. say 3.50 lacs per year.

In such case Machinery capitalized in 1991 = Rs.50 lacs & how much pre-operative expesnses (Int on loan ) can capitalize? 3.50 lacs or 30 lacs.

Pl explain.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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06 April 2015 Interest on loan can be capitalized up to the date of commissioning of the equipment. So only part of 3.50 lacs can be capitalized and not 30 lacs.

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