Question

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 1

1. ₹ 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.
2. 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.
3. Compensation and remuneration to employees are done in normal course of business, therefore it is revenue expenditure.
4. It is a capital expenditure. Any expenses incurred on bringing the asset into operation will be capitalized.
5. Compensation and remuneration to employees are done in normal course of business; therefore it is revenue expenditure.
6. It is deferred revenue expenditure as the benefit will be derived over a number of years.