A company puchases a machine by taking a loan. The company takes 15 days to install the machinery in its factory. The loan is to be paid at the end of three years. Will the interest on loan be capitalized to the cost of asset? If yes, how much?
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Capitalization of interest for loan taken to purchase plant
Replies (6)
you have to book interest in P & L A/c dont capitalize it...
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Since it will meet defination of qualifying asset, interest cost should be charged to income statement. Originally posted by : Pankaj Arora |
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you have to book interest in P & L A/c dont capitalize it... |
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P&L account
i Think interest paid for 15 days during installation of machinery is to be capitalised & for remaining period it should be charged to P&L account.
agree with mr. vikas , interest paid upto the time of installation needs to be capitalised and after it commences production from machinery the interest paid to be charged to p&l a/c
That is not correct. Borrowing cost is eligible to be capitalised only for qualifying assets (refer para 6 of AS 16). Qualifying assets are those which takes substantial time to get ready for its intended use (CASR 2006 say's 12 months, explanation in para 3.2). Since the machinery acquired will not meet the definition of qualifying asset. Interest cost could not be capitalised. The same should be charged off to income statement.
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