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Question

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.

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Solution

  1. Loss on sale of furniture of ₹7,500 is revenue in nature and purchase + cartage ₹ 6,050 will be capitalized.
  2. It is a capital expenditure as the legal fee is paid to acquire the asset.
  3. It is a capital expenditure, as new machinery is purchased and it will result in increasing the earning capacity of the firm.
  4. It is a capital expenditure, as damages paid on accident does not result in increasing the earning capacity of the firm
  5. It is a capital expenditure, as new construction is done and it will result in increasing the earning capacity of the firm.

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