Capital And Revenue Classification Of Receipts Study Material

BCOM 1st Year Capital And Revenue Classification Of Receipts Study Material Notes

6. Interest on Loan and Capital: Normally, interest on loan and capital is taken to be a revenue expenditure but if the amount of loan and capital is used to acquire some fixed assets, interest paid on it for the period till the asset is put to actual use, will be treated as capital expenditure.

7. Development Expenses: In some businesses, a significant amount is spent on research and development before the start of actual process of production and income generation. Such expenses are considered to be the capital expenditure. For example, tea and rubber plantation, horticulture, mines, etc.

Q.2. Classify the following expenses between capital and revenue, stating reasons in each case:

1. * 4,000 spent on dismantling, removing and reinstalling plant and machinery to a more convenient location; 600 paid for removal of stock to new site.

2. An old plant costing * 17,000 was purchased; * 1,200 were paid on its carriage; this plant was

repaired at a cost of 4,800; 1,500 was paid to an engineer as honorarium who had supervised its installation

3. During the year * 1,800 were spent on the repair of various machines.

4. 550 spent as lawyer’s fees to defend a suit claiming that the firm’s factory site belonged to the

plaintiff. The suit was successful.

5. 12,000 were spent on heavy advertising in connection with the introduction of a new product.

6. 200 were paid as municipal tax in connection with a building which was purchased this year for

*20,000.

7. A sum of 1,300 was spent on whitewashing and painting of new factory.

Sol. 1. As the factory has been removed to a more convenient site, these expenses should be

treated as deferred revenue expenditure because the benefit from the removal is long lasting. Therefore, * 4,000 plus 600 should be put to a suspense account and only a portion, say one fifth, charged to the profit & loss account each year.

2. The purchase cost of the plant, expenditure on its carriage and repairs and engineer’s honorarium for supervising its installation all are of capital nature because these expenditures have been made before the plant is put to use.

3. 1,800 spent on repairs of machines constitute an item of revenue expenditure because it is an expenditure of routine nature.

4. 3 550 spent as lawyer’s fee to defend the suit is a revenue expenditure since the aim is to maintain the firm’s title to the assets and not to acquire any new asset.

5. 12,000 spent on heavy advertising is deferred revenue expenditure since the benefit of this expenditure will occur for several years.

6. 200 paid by way of municipal tax on building is a revenue expenditure because it is a routine business expenditure.

7. 1,300 spent on whitewashing and painting of new factory is an expenditure of revenue nature. However, if it is felt that the cost is heavy and yearly white washing and painting of factory is not required, then it may be treated as deferred revenue expenditure and be spread over two or three years.

B.Com Ist Year Foreign Trade And Economic Growth Question Answer Notes

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BCOM 1st Year Capital And Revenue Classification Of Receipts Study Material Notes

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