Question

The term loan of Rs. 5,00,000 was received from IFCL. It was used as under,

I. Rs. 2,00,000 was advanced to suppliers for capital-work-in-progress and
II. Rs. 3,00,000 was used for financing the working capital

The interest payable would be treated as __________________.

• A. on both I and II as capital expenditure
• B. on I as capital expenditure and on II as revenue expenditure
• C. on I as deferred expenditure and on II as revenue expenditure
• D. on I as deferred revenue expenditure and on II as capital expenditure

Answer 1

The correct option is B on I as capital expenditure and on II as revenue expenditure

If an asset is not completed is not completed at that time when balance sheet is on that asset up to the balance sheet date are transferred to an account called capital work in progress account.

This account is shown separately in the balance sheet below the fixed asset. Capital work in progress contains all expenses incurred on the asset until it is converted into working condition. All these expense will become part of that cost of asset. When any expense is incurred or paid, it is included in the capital work in progress account through the following entry:

Debit : Work in progress Account

Credit: Cash/Bank/Payable Account

When an asset is completed and it is ready to work, all cost will transfer to the relevant asset account through the following entry;

Debit : Asset Account

Credit : Capital Work in progress Account

Therefore, interest paid on expenses related to capital work in progress is capitalized.

Working capital : It is the capital of business which is used in its day to day trading operations, calculated as the current assets minus current liabilities,

therefore, interest paid on the same is treated as revenue expenditure.