Scenario::::: Equipment worth Rs.2 Crore is imported by a Govt Organisation, placing an order on a local authorised equipment dealer. The mode of payment was through local letter of credit and bank has charged Rs.2 Lakhs as LC charges. Following questions have arisen during capitalization of the said equipment.
- Should the letter of credit (LC) expenses charged by the bank be included as cost component in capitalising the equipment?
- Are LC charges are bank charges? If yes, bank charges are of revenue nature/administrative overheads and so cannot be capitalized. If no, each made by Demand Draft or Cheque also come with certain charges (however negligible it maybe), should they be also capitalized?
- If it is advised that LC charges are to be capitalised but DD/Cheque charges need not be. Are LC, DD and Cheque not instruments of same nature for payment? How come LC charges are of capital nature and DD/Cheque charges is revenue nature?
Please clarify whether to consider the LC charges or not in capitalization (with explanation).
CAclubindia
