Illustration Problems with Solution - Accountancy: Capital and Revenue Transactions

Illustration 1

State with reasons whether the following are capital or revenue expenditure:

i. Expenses incurred in connection with obtaining a licence for starting the factory for Rs.  25,000.

ii.   A factory shed was constructed at a cost of Rs.  2,00,000. A sum of Rs.  10,000 had been incurred in the construction of temporary huts for storing building material.

iii.  Overhaul expenses of second-hand machinery purchased amounted toRs.  5,000.

Solution

i.               It is a capital expenditure since it is incurred to acquire the right to carry on business.

ii.               Cost of construction of building including cost of temporary huts is capital expenditure. 

iii.               It is a capital expenditure because overhaul expenses are incurred to put second-hand machinery in working condition to get long-term advantage.

Illustration 2

State with reasons whether the following are capital or revenue or deferred revenue expenditure:

i.               Advertisement expenses amounted to Rs.  10 crores to introduce a new product.

ii.               Expenses on freight for purchasing new machinery.

iii.               Freight and insurance on the new machinery and cartage paid to bring the new machinery to the factory.

Solution

i.               The effect of heavy advertisement expenses will extend to more than one accounting period, but it does not create any property of tangible or intangible nature and hence it is deferred revenue expenditure.

ii.               It is a capital expenditure since it is incurred up to the point the machine is ready for use.

iii.               These are capital expenditures since they are incurred up to the point the machine is ready for use.

Illustration 3

State whether the following are capital, revenue or deferred revenue expenditure.

i.               Carriage of  Rs.  1,000 spent on machinery purchased and installed.

ii.               Office rent paid  Rs.  2,000.

iii.               Wages of  Rs.  5,000 paid to machine operators.

iv.               Hire charges for the use of motor vehicle, hired for five years, but paid yearly.

Solution

i.               Carriage of Rs.  1,000 spent on machinery purchased and installed is capital expenditure.

ii.               Office rent paid Rs.  2,000 is revenue expenditure.

iii.               Wages of Rs.  5,000 paid to machine operators is revenue expenditure.

iv.               Hire charges for the use of motor vehicle, hired for five years, but paid yearly is revenue expenditure.

Illustration 4

State whether the following are capital or revenue items.

i.               Rs.  5,000 spent towards additions to buildings.

ii.          Second-hand motor car purchased for Rs. 30,000 and paid Rs. 2,000 as repairs  immediately.

iii.               Rs.  10,000 was spent on painting the new factory.

iv.               Freight and cartage on the new machine Rs.  150, erection charges Rs.  200.

v.               Rs.  150 spent on repairs before using a second hand car purchased recently.

Solution

i.               Rs.  5,000 spent towards additions to buildings is capital expenditure.

ii.               The entire amount of  Rs.  32,000 should be treated as capital expenditure.

iii.               Rs.  10,000 spent on painting the new factory should be treated as capital expenditure.

iv.               Freight, cartage and erection charges are capital expenditures.

v.               Rs.  150 being expense to bring the asset in usable condition, is a capital expenditure.

Illustration 5

Classify the following expenses as capital or revenue.

i. The sum of  Rs.  3,200 has been spent on a machine as follows:

a. Rs.  2,000 for additions to double the output.

b. Rs.  1,200 for repairs necessitated by negligence.

ii. Overhauling expenses of Rs.  25,000 for the engine of a motor car to get better fuel efficiency.

Solution

i. a) Rs.  2,000 spent on additions should be treated as capital expenditure

b) Rs.  1200 spent on repairs should be treated as revenue expenditure.

ii. Overhauling expenses are incurred for the engine of a motor car to get better fuel efficiency. So this expenditure should be treated as capital expenditure.

Illustration 6

Classify the following expenditures and receipts as capital or revenue:

i.               Rs.  10,000 spent as travelling expenses of the directors on trips abroad for the purchase of fixed assets.

ii.               Amount received from trade receivables during the year.

iii.               Amount spent on demolition of building to construct a large building on the same site.

iv.               Insurance claim received on account of a machinery damaged by fire.

Solution

i.               Capital expenditure

ii.               Revenue receipt

iii.               Capital expenditure

iv.               Capital receipt.