D k Goel
Class-XI
Question & Answer
Capital and Revenue
Question
1:
State with
reasons whether the following are capital or revenue expenditures:
(i) A new machine is purchased for ₹ 60,000, ₹ 800 were spent on its carriage
and ₹ 1,500 were paid as wages for its installation.
(ii) A sum of ₹ 10,000 was spent on painting the new factory.
(iii) ₹ 5,000 paid for the erection of a new machine.
(iv) ₹ 2,000 were spent on repairs before using a second hand generator
purchased recently.
(v) ₹ 1,500 were spent on the repair of a machinery.
(vi) ₹ 10,000 was paid as brokerage on issue of shares and other expenses of
issue were ₹ 25,000.
Answer
1:
- Purchase of new machinery is a capital
expenditure as it will result in increasing the earning capacity of the
firm. Cost of installation will also be capitalized as it’s spent before
machinery is put to use.
- Since, the factory is been painted for the
first time it will be treated as a capital expenditure.
- Cost of erection of new machine will also be
capitalized as it’s spent before machinery is put to use.
- It is a capital expenditure as repairs are
done before the generator is put to use.
- Repairs are done on regular basis that is why
it will be treated as revenue expenditure.
- Expenses incurred on raising the capital will
be treated as capital expenditure. Therefore, brokerage and other issue
expenses are capital in nature.
Question
2:
State
whether the following expenditure are Capital, Revenue or Deferred Revenue.
Give reasons:
(i) Furniture of the book value of ₹ 10,000 were sold off at ₹ 2,500 and new
furniture of the value of ₹ 6,000 were acquired, cartage on purchase ₹ 50.
(ii) Property purchased for ₹ 20,00,000 and ₹ 1,50,000 paid for its
registration and legal fee.
(iii) Replacement of old machine by a new one.
(iv) Damages paid by a transport company to its passengers injured in an
accident.
(v) Erection of shed for parking of vehicles at a cost of ₹ 10 Lac.
Answer
2:
- Loss on sale of furniture of ₹7,500 is revenue
in nature and purchase + cartage ₹ 6,050 will be capitalized.
- It is a capital expenditure as the legal fee
is paid to acquire the asset.
- It is a capital expenditure, as new machinery
is purchased and it will result in increasing the earning capacity of the
firm.
- It is a capital expenditure, as damages paid
on accident does not result in increasing the earning capacity of the firm
- It is a capital expenditure, as new
construction is done and it will result in increasing the earning capacity
of the firm.
Question
3:
Classify
the following into Capital, Revenue and Deferred Revenue expenditure, stating
reasons in each case:
(a) A sum of ₹ 32,000 has been spent on a machine as follows: (i) ₹ 20,000
for addition to double the output, (ii) ₹ 5,000 for repairs necessitated by
negligence and (iii) ₹ 7,000 for replacement of worn-out parts.
(b) Total expenditure on a cinema building during the year was ₹ 2,00,000 out
of which 20% related to repairs and 80% represented improvements and additions.
(c) Compensation paid to a retrenched employee for the loss of employment.
(d) Second-hand furniture worth ₹ 40,000 was purchased and repairing of this
furniture cost ₹ 15,000. The furniture was installed by own workmen-wages for
this being ₹ 5,000.
(e) A person was injured by the motor car of the company. ₹ 10,000 was paid to
him by way of compensation.
(f) Advertisement expenditure in special advertisement drive.
Answer
3:
- ₹ 20,000 is capital expenditure as it will
result in double output of the firm. Repairs and replacement of worn out
parts is revenue in nature as it is done on regular basis.
- Repairs of ₹ 40,000 is revenue in nature as it
is done on regular basis and ₹ 1,60,000 is done on improvements which will
give future benefits, therefore its capital expenditure.
- Compensation and remuneration to employees are
done in normal course of business, therefore it is revenue expenditure.
- It is a capital expenditure. Any expenses
incurred on bringing the asset into operation will be capitalized.
- Compensation and remuneration to employees are
done in normal course of business; therefore it is revenue expenditure.
- It is deferred revenue expenditure as the
benefit will be derived over a number of years.
Question
4:
State with
reasons whether the following receipts would be treated as Capital or Revenue:-
(a) ₹ 5,000 received from a customer whose account was previously written off
as bad.
(b) ₹ 20,000 received from sale of old machine.
(c) ₹ 2,60,000 received from sale of stock-in-trade.
(d) ₹ 5,00,000 is contributed by a partner as capital.
(e) Took a loan of ₹ 10 Lac from Punjab National Bank.
(f) Received ₹ 4 Lac as subsidy from State Government.
(g) Received ₹ 8 Lac as grant from State Government for the construction of
quarters for the staff.
Answer
4:
- It is a revenue receipt as it is received in
normal course of business.
- It is a capital receipt as it is a capital
gain which arose by selling of machinery.
- It is a revenue receipt as it is received in
normal course of business over exchange of goods.
- It is a capital receipt as it will improve the
financial position of the company of the company.
- It is a capital receipt as it will enhance the
productivity of the company.
- It is a revenue receipt as it is received
regularly from the government.
- It is a capital receipt as it is received for
construction and will it will result in increasing the earning capacity of
the firm.
