Conversion of Capital Asset(Land) into stock in trade

[CA A K PATHAK]

Dear all,

I have following two queries from the esteemed forum:-
1. Capital Asset(Land) purchased in the year 1986-87 converted into
stock in trade in the current financial year. What will be the
Accounting treatment?

2. Capital Advance paid for acquisition of Capital Assets forfeited by
the seller. What will be Accounting Treatment.

Best Regards,

CA A K PATHAK

[SUSIL MISHRA]

Dear Pathak

 

From My point of View there is one transfering entry required

 

(1) Stock- In- Trade A/c.................Dr

     

        To Fixed Asset/ Invetment (Land) A/c.........Cr.

 

And For your Second query

 

(2)

 

Suppose your entry at the time of payment

 

Bank A/c....................Dr.

 

   To Creditors....................Cr.

 

So just reverse at the time of forfeited.

 

And one thing you can't debited any capital asset at the time of making payment in advance.

Suppose you have paid advance for the purchase of Land. From the tax point of view before registration it is treated as asset but in accounting point of view it is not an asset.

 

So at the time of making the advance payment you can't debit any particular asset.

 

 

 

 

 

 

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Thanks & Ragards

CA Susil Kumar Mishra

Sr. Manager

Manappuram Group of Companies

E-mail Id. cadi...@gmail.com

[Abhay Pathak]

Dear Mr. Susil,

Thanks for your response to my queries. Regading the said queries, I have some more clerifiactions as under:-

Query No. 1. - Land is converted into Stock in Trade at Fair Value as on the date of transfer. Whether profir arises on this conversion shall be credited to the Profit & Loss Account or transferred to Capital Reserve?

Query No.2. - As advised by you, the entry passed at the time of payment of advance can not be reversed because the proposed seller of land has not refunded the advance. The advance is forfeited. Whether this loss is a Capital Loss or Revenue Loss?

Pls. advise.

Thanks,

CA A K PATHAK

On Wed, 23 Feb 2011 07:12:18 +0530 wrote

[SUSIL MISHRA]

Dear Pathak,

 

Ans to your  Question

 

(1) At the time of conversion any profit arises you have to transfer the profit to Capital Reserve not to P & L A/c.

 

(2) If ypu are giving the payment in advance for any capital asset then the loss arises due to forfeit is treated as capital loss and any payment related to purchase of rawmaterials alike is treated as Revenue Loss.