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 ₹ 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

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.
2. Since, the factory is been painted for the first time it will be treated as a capital expenditure.
3. Cost of erection of new machine will also be capitalized as it’s spent before machinery is put to use.
4. It is a capital expenditure as repairs are done before the generator is put to use.
5. Repairs are done on regular basis that is why it will be treated as revenue expenditure.
6. Expenses incurred on raising the capital will be treated as capital expenditure. Therefore, brokerage and other issue expenses are capital in nature.