Reimbursement of Capital Expenditure
This query is : Resolved
04 March 2022
If a business enterprise spends 10 lacs on capital expenditure (capex) and receives 5 lacs (non refundable) as contribution/share towards the same from a third party for certain share in profit, what will be the accounting treatment in the books for capex and the amount received?
04 March 2022
Capitalise entire 10 lacs in the books of accounts and claim depreciation.
Treat the receipt of 5 lacs as share capital in the books of accounts.
Treat the receipt of 5 lacs as share capital in the books of accounts.
04 March 2022
It’s a partnership firm
04 March 2022
Take him as parner of the firm then only profit can be shared.
04 March 2022
This is a retail enterprise. Third party has invested only in one store so cannot be made a partner. His investment is only towards capex of one particular store. His remuneration to run the store is share in profit of that store only. His investment is non refundable and he does not have status of partner.
06 March 2022
This is a peculiar situation. Reduce capital expenditure to the extent of money received.
Make share of profit payment as rental payment.
Make share of profit payment as rental payment.
06 March 2022
Yes I also had the same in mind that reduce capex by the contribution received. I believe another way to account for it could be to create a capital reserve instead of reducing the capex and then amortise capital reserve over the useful life of the assets created. This way full value of assets created is capitalised and depreciation is charged on WDV of assets year on year. In other words instead of one year we spread it over 6 years which is the useful life of assets created. Your views on this please?
06 March 2022
It's based on grants accounting. It's a right way but name it as capital grants instead of capital reserve.
06 March 2022
Noted. Thanks for your valuable inputs. Extremely helpful. Thanks
07 March 2022
In case of such grants accounting, it will be considered as gift and tax payable on gifts exceed 50,000.
It's better to reduce the capital expenditure to the extent of 5 lacs and pay rental instead of sharing profit.
It's better to reduce the capital expenditure to the extent of 5 lacs and pay rental instead of sharing profit.
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