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Question

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 40,000 was spent on painting the new factory.
(iii) 6,000 were paid for annual insurance premium.
(iv) 20,000 were spent on repairs before using a second hand generator purchased recently.
(v) 5,000 were spent on the repair of a machinery.
(vi) 50,000 were spent for airconditioning of the office of the manager.

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Solution

1. Capital Expenditure
Reason: When a fixed asset is purchased, then all the expenses up to the date at which the asset is put to use are capitalised. So, expenses incurred on carriage and installation of new machinery will be considered as capital expenditure.
2. Capital Expenditure
Reason: Whitewashing (or painting) expenses incurred on the building will increase the revenue generating capacity of the building, thus, it will be capitalised and treated as capital expenditure.
3. Revenue Expenditure
Reason: Annual insurance premium is a recurring expenditure to carry on day-to-day business activities. Thus, it is a revenue expense.
4. Capital Expenditure
Reason: Expenditure incurred once in many years to increase the working capacity and revenue generating capacity of the asset, and then it is termed as capital expenditure. Thus, repairs made to the second hand machinery (purchased recently) are a one-time expense and thus, will be capitalised and treated as capital expenditure.
5. Revenue Expenditure
Reason: The amount spent on repairs of machinery is a recurring expenditure and helps in increasing the working capacity of the machinery but does not add value to it. Thus, it is a revenue expense.
6. Capital Expenditure
Reason: Expenditure incurred once in many years to increase the working capacity and revenue generating capacity of the asset, and then it is termed as capital expenditure. Thus, amount spent for air conditioning of the manager’s will increase the value of the asset and thus, it is a capital expenditure.

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