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car insurance...

CA Vishal kapoor (Partner) (320 Points)

14 July 2010

Hi,

My question is that one of our clients purchased a new car worth Rs 800000 & paid 35000 for the car RC & Insurance.

whether dis RC & Insurance capitalized to the Car A/c or not?

or only RC is capitalized?

thanks in advance

Vishal

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15 Replies

CA Shiv (Business Controller) (2987 Points)
Replied 14 July 2010

Yes only RC is to be capitalised as insurance period coverage is only for one year....

roopa (b.com) (364 Points)
Replied 14 July 2010

agree vth shivang sir

Amir (Learner) (4016 Points)
Replied 14 July 2010

But I feel it will be capitalised .....................:(

Check this -

/forum/first-insurance-of-car-88998.asp

CA Shiv (Business Controller) (2987 Points)
Replied 14 July 2010

Amir you only said that as per AS-10 para 20...

Para 20 of AS-10 reads as under -

The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.

Simple question is... without Insurance the car wont work? it wont run on roads? Car cannot be termed as in working condition if we dont take insurance.....?

Thanks

CA Vishal kapoor (Partner) (320 Points)
Replied 14 July 2010

thanks 4 d replies..

i m still in confusion that whether 2 capitalize or not.

Abhimanyu Bind (CA Final Student & Audit Assitant) (2049 Points)
Replied 14 July 2010

Dear Vishal,

RC and insurance charges both will be included in the cost of CAR means will be capitalized for that I want give following lines of AS-6 Depreciation Accounting

Point 7.4-1 says that the Cost of an asset is the total cost spent in connection with its acquisition, installation and commissioning as well as for add item or improvement to the depreciable assets.

When we pay insurance charges at the time acquisition of assets its simply give assurance to the asset against any damage.

Leave all those thyorical concepts simply I want say you that I have written the Accounts company and when we write entry for a new tanker bought under fixed assets we capitalize the insurance charges and IT department never raised any question against this.

Thanks,

Hopefully it will clear your concept.

CA Vishal kapoor (Partner) (320 Points)
Replied 15 July 2010

thanks to all for there replies..

Sharad Saini (Student) (286 Points)
Replied 15 July 2010

all the costs incurred before the assets is put to use are should be capitalised. First insurance is incurred before the asset is put to use so it should be capitalized. RC should also be capitalised as it is compulsory for acquring the ownership.....

CA. Ranjit Vysyaraju (Deputy Manager) (147 Points)
Replied 15 July 2010

Dear Abhimanyu,

IT Department won't raise any issue, since it is beneficail to Department.

Capitalisation will increase Tax Payable.

According to me Insurance need to be taken as revenue, since the benefit is gets expired in one year.

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 15 July 2010

Insurance is a recurring charge. However till the time there is no insurance of the car the same cannot be taken out from the showroom. So first time insurance is compulsory to use the car and hence the same should be capitalised.

Subsequent payments towards insurance should be charged to revenue.

This issue also discussed here

/experts/car-insurance-432590.asp

So agree with Amir.

CA Naveen Kumar Mavi ( CA - JOB CS Final & Graduated B.COM(H)) (246 Points)
Replied 15 July 2010

With due respect i think Mr. CA Shivang is bit confused regarding this matter. 1st year insurance must be capatlized as u can not run car on roads wihout first insurance. You cannot bring out car without first insurance.

CA Shiv (Business Controller) (2987 Points)
Replied 15 July 2010

Yes may be i can go with explanantion of Aditya.. its well explained...

@ navin m not confused here.. some facts are:

Insurance is for one year..

Repetitive every year...

Car can run and work withour insurance...(Refer AS 10 for capitalisation of cost of Fixed asset)

So basis on that it can be termed as revenue exp..

No confusion in this matter at all...

(Guest)

should be capitalised.

Agree with Amir and Aditya Sir......

Regards

K.Ilayaraja

Abhimanyu Bind (CA Final Student & Audit Assitant) (2049 Points)
Replied 16 July 2010

Dear Ranjit that was only a practical example but if we follow the rules then also it is right to capitalized the insurance charges if it is to be paid while acquiring the new assets first time.

Thx