|
Illustration1.
State whether the following are capital, revenue or deferred revenue expenditure.
(i) Carriage of 7,500 spent on machinery purchased and installed.
(ii) Heavy advertising costs of 20,000 spent on the launching of a company’s new product.
(iii) 200 paid for servicing the company vehicle, including ` 50 paid for changing the oil.
(iv) Construction of basement costing 1,95,000 at the factory premises.
Solution :
(i) Carriage of 7,500 paid for machinery purchased and installed should be treated as a Capital Expenditure.
(ii) Advertising expenses for launching a new product of the company should be treated as a Revenue Expenditure. (As per AS-26)
(iii) 200 paid for servicing and oil change should be treated as a Revenue Expenditure.
(iv) Construction cost of basement should be treated as a Capital Expenditure.
Illustration 2.
State whether the following are capital or revenue expenditure.
(i) Paid a bill of 10,000 of Mr. Kumar, who was engaged as the erection engineer to set up a new automatic machine costing 20,000 at the new factory site.
(ii) Incurred 26,000 expenditure on varied advertisement campaigns under taken yearly, on a regular basis, during the peak festival season.
(iii) In accordance with the long-term plan of providing a well- equipped Labour Welfare Centre, spent 90,000 being the budgeted allocation for the year.
Solution :
(i) Expenses incurred for erecting a new machine should be treated as a Capital Expenditure.
(ii) Advertisement expenses during peak festival season should be treated as a Revenue Expenditure.
(iii) Expenses incurred for Labour Welfare Centre should be treated as a Capital Expenditure.
Illustration 3.
Classify the following items as capital or revenue expenditure :
(i) An extension of railway tracks in the factory area;
(ii) Wages paid to machine operators;
(iii) Installation costs of new production machine;
(iv) Materials for extension to foremen’s offices in the factory;
(v) Rent paid for the factory;
(vi) Payment for computer time to operate a new stores control system,
(vii) Wages paid to own employees for building the foremen’s offices.
Solution :
(i) Expenses incurred for extension of railway tracks in the factory area should be treated as a Capital Expenditure because it will yield benefit for more than one accounting period.
(ii) Wages paid to machine operators should be treated as a Revenue Expenditure as it will yield benefit for the current period only.
(iii) Installation costs of new production machine should be treated as a Capital Expenditure because it will benefit the business for more than one accounting period.
(iv) Materials for extension to foremen’s offices in the factory should be treated as a Capital Expenditure because it will benefit the business for more than one accounting period.
(v) Rent paid for the factory should be treated as a Revenue Expenditure because it will benefit only the current period.
(vi) Payment for computer time to operate a new stores control system should be treated as Revenue Expenditure because it has been incurred to carry on the normal business.
(vii) Wages paid for building foremen’s offices should be treated as a Capital Expenditure because it will benefit the business for more than one accounting period.
Illustration 4.
For each of the cases numbered below, indicate whether the income/expenditure is capital or revenue.
(i) Payment of wages to one’s own employees for building a new office extension.
(ii) Regular hiring of computer time for the preparation of the firm’s accounts.
(iii) The purchase of a new computer for use in the business.
(iv) The use of motor vehicle, hired for five years, but paid at every six months.
Solution :
(i) Payment of wages for building a new office extension should be treated as a Capital Expenditure.
(ii) Computer hire charges should be treated as a Revenue Expenditure.
(iii) Purchase of computer for use in the business should be treated as a Capital Expenditure.
(iv) Hire charges of motor vehicle should be treated as a Revenue Expenditure.
Illustration 5.
State with reasons whether the following are capital or revenue expenditure :
(i) Freight and cartage on the new machine 150, and erection charges 500.
(ii) Fixtures of the book value of 2,500 sold off at 1,600 and new fixtures of the value of 4,000 were acquired. Cartage on purchase 100.
(iii) A sum of 400 was spent on painting the factory.
(iv) 8,200 spent on repairs before using a second hand car purchased recently, to put it in usable condition.
Solution :
(i) Freight and cartage totaling 650 should be treated as a Capital Expenditure because it will benefit the business for more than one accounting year.
(ii) Loss on sale of fixtures (2,500 – 1,600) = 900 should be treated as a Capital Loss. The cost of new fixtures and carriage thereon should be treated as a Capital Expenditure because the fixture will be used for a long period. So (4,000+1,000)the cost of new fixture will be 4,100.
(iii) Painting of the factory should be treated as a Revenue Expenditure because it has been incurred to maintain the factory building.
(iii) Repairing cost of second hand car should be treated as a Capital Expenditure because it will benefit the business for more than one accounting year.
Illustration 6.
State the nature (capital or revenue) of the following expenditure which were incurred by Vedanta & Co. during the year ended 30th June, 2016 :
(i) 350 was spent on repairing a second hand machine which was purchased on 8th May, 2016 and 200 was paid on carriage and freight in connection with its acquisition.
(ii) A sum of 30,000 was paid as compensation to two employees who were retrenched.
(iii) 150 was paid in connection with carriage on goods purchased.
(iv) 20,000 customs duty is paid on import of a machinery for modernisation of the factory production during the current year and ` 6,000 is paid on import duty for purchase of raw materials.
(v) 18,000 interest had accrued during the year on term loan obtained and utilised for the construction of factory building and purchase of machineries; however, the production has not commenced till the last date of the accounting year.
Solution :
(i) Repairing and carriage totaling 550 for second hand machine should be treated as a Capital Expenditure.
(ii) Compensation paid to employees shall be treated as a Revenue Expenditure.
(iii) Carriage paid for goods purchased should be treated as a Revenue Expenditure.
(iv) Customs duty paid on import of machinery to be treated as a Capital Expenditure. However, import
duty paid for raw materials should be treated as a Revenue Expenditure.
(v) Interest paid during pre-construction period to be treated as a Capital Expenditure.
Illustration 7.
State with reasons whether the following items relating to Parvati Sugar Mill Ltd. are capital or revenue :
(i) 50,000 received from issue of shares including ` 10,000 by way of premium.
(ii) Purchased agricultural land for the mill for ` 60,000 and ` 500 was paid for land revenue.
(iii) 5,000 paid as contribution to PWD for improving roads of sugar producing area.
(iv) 40,000 paid for excise duty on sugar manufactured.
(v) 70,000 spent for constructing railway siding.
Solution :
(i) 40,000 (50,000 – 10,000) received from issue of shares will be treated as a Capital Receipt. The premium of 10,000 should be treated as a Capital Profit.
(ii) Cost of land 60,000 to be treated as Capital Expenditure and land revenue of 500 to be treated as Revenue Expenditure.
(iii) Contribution paid to PWD should be treated as a Revenue Expenditure.
(iv) Excise duty of 40,000 should be treated as a Revenue Expenditure.
(v) 70,000 spent for constructing railway siding to be treated as a Capital Expenditure.
Illustration 8.
State with reasons whether the following are Capital Expenditure or Revenue Expenditure :
(i) Expenses incurred in connection with obtaining a licence for starting the factory were 10,000.
(ii) 1,000 paid for removal of stock to a new site.
(iii) Rings and Pistons of an engine were changed at a cost of ` 5,000 to get full efficiency.
(iv) 2,000 spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged to the Plaintiff. The suit was not successful.
(v) 10,000 were spent on advertising the introduction of a new product in the market, the benefit of which will be effective during four years.
(vi) A factory shed was constructed at a cost of 1,00,000. A sum of 5,000 had been incurred for the construction of the temporary huts for storing building materials.
Solution :
(i) 10,000 incurred in connection with obtaining a license for starting the factory is a Capital Expenditure. It is incurred for acquiring a right to carry on business for a long period.
(ii) 1,000 incurred for removal of stock to a new site is treated as a Revenue Expenditure because it is not enhancing the value of the asset and it is also required for starting the business on the new site.
(iii) 5,000 incurred for changing Rings and Pistons of an engine is a Revenue Expenditure because, the change of rings and piston will restore the efficiency of the engine only and it will not add anything to the capacity of the engine.
(iv) 2,000 incurred for defending the title to the firm’s assets is a Revenue Expenditure.
(v) 10,000 incurred on advertising is to be treated as a Revenue Expenditure (As per AS-26).
(vi) Cost of construction of Factory shed of 1,00,000 is a Capital Expenditure, similarly cost of construction of small huts for storing building materials is also a Capital Expenditure.
Illustration 9.
State clearly how you would deal with the following in the books of a Company :
(i) The redecoration expenses 6,000.
(ii) The installation of a new Coffee-making Machine for 10,000.
(iii) The building of an extension of the club dressing room for 15,000.
(iv) The purchase of Snacks & food stuff 2,000.
(v) The purchase of V.C.R. and T.V. for the use in the club lounge for 15,000.
Solution :
(i) The redecoration expenses of 6,000 shall be treated as a Deferred Revenue Expenditure.
(ii) The installation of a new Coffee - Making Machine is a Capital Expenditure because it is the acquisition of an asset.
(iii) 15,000 spent for the extension of club dressing room is a Capital Expenditure because it creates an asset of a permanent nature.
(iv) The purchase of snacks & food stuff of 2,000 is a Revenue Expenditure.
(v) The purchase of V.C.R. and T.V. for 15,000 is a Capital Expenditure, because it is the acquisition of assets.
|
