3 Marks Question

Question 13 Marks

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

A new machine is purchased for ₹ 60,000, ₹ 800 were spent on its carriage and ₹ 1,500 were paid as wages for its installation.
A sum of ₹ 10,000 was spent on painting the new factory.
₹ 5,000 paid for the erection of a new machine.
₹ 2,000 were spent on repairs before using a second hand generator purchased recently.
₹ 1,500 were spent on the repair of a machinery.
₹ 10,000 was paid as brokerage on issue of shares and other expenses of issue were ₹ 25,000.

Answer

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 23 Marks

State whether the following expenditure are Capital, Revenue or Deferred Revenue. Give reasons:

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.
Property purchased for ₹ 20,00,000 and ₹ 1,50,000 paid for its registration and legal fee.
Replacement of old machine by a new one.
Damages paid by a transport company to its passengers injured in an accident.
Erection of shed for parking of vehicles at a cost of ₹ 10 Lac.

Answer

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 33 Marks

State with reasons whether the following receipts would be treated as Capital or Revenue:

₹ 5,000 received from a customer whose account was previously written off as bad.
₹ 20,000 received from sale of old machine.
₹ 2,60,000 received from sale of stock-in-trade.
₹ 5,00,000 is contributed by a partner as capital.
Took a loan of ₹ 10 Lac from Punjab National Bank.
Received ₹ 4 Lac as subsidy from State Government.
Received ₹ 8 Lac as grant from State Government for the construction of quarters for the staff.

Answer

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.

Question 43 Marks

Classify the following into Capital, Revenue and Deferred Revenue expenditure, stating reasons in each case:

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.
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.
Compensation paid to a retrenched employee for the loss of employment.
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.
A person was injured by the motor car of the company. ₹ 10,000 was paid to him by way of compensation.
Advertisement expenditure in special advertisement drive.

Answer

₹ 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.

Account 3 Marks Question