Hi friends,
Plz let me know that if any person is an authorized dealer of a car manufacturing company,how should they account the demo vehicles used by them .Should demo vehicle be treated as an Asset or Stock in trade.if its an asset then what should be the depreciation rate (ie P& M or Motor Car)
Dear friend,
Your question, “How should they account the demo vehicles used by them?”.
From your statement it gives an impression that the subject vehicle used for the purpose of demo is one that is one of the vehicles put for sale. It is also general assumption that no item accounted as an Asset would be sold as a regular product put for sales., in case it is sold ( which was treated as an Asset), the receipts would be classified as an “Investing Cash Flow”.
Now, next question is “Should demo vehicle be treated as an Asset”. Not necessarily. You need not show it as an Asset. It is a part of “Stock in trade”, and same would be put to sale and the receipts on the disposal of the same would be treated as “Operating Cash Flow”, like regular sale proceeds.
Is it clear, my friend, that the vehicle put for demo is not an asset?
Rate of Depreciation – Income Tax Act
As per Income Tax Act, “Machinery and Plant” and “Motor Cars” come under “Block 5” which carries Rate of Depreciation of 15%.
Here, we need to remember that, if the “Motor Cars” put the use in the business of Hire, Rate of Depreciation would be 40%.
Rate of Depreciation – under Companies Act
Rate of Depreciation on Motor cars is 30%.
If the same is used in a business of running them on Hire, Rate of Depreciation is 40%
If the Company wants to trade in vehicle only on success of DEMO.... If the DeMO turns out to be unsuccessful then How should such expense be accounted?
Another case is the Company is anticipating some one may buy. But so Far no order fo rthe sam eis received ... In such case how should the expense be treated?
Dear Swetha S
If the same product is just before the incorporation of company the same can be treated as preliminary and to be amortized over a period of time in the balance sheet treating as it as an asset as per AAR kerala 2003. But as per accounting rule and standard the same can even be treated as stock in trade, and further sale iof SIT is an PGBP income/loss
Prototype cost are intangible assets but this is an asset to the company which is used for distribution and promotion. If the manufacturer gives a demo vehicle to you, make it an asset and the manufacturer will expense it under promotional expenses.
CAclubindia
