Illustrations - Capital and Revenue Commerce Notes | EduRev

Crash Course of Accountancy - Class 11

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Commerce : Illustrations - Capital and Revenue Commerce Notes | EduRev

The document Illustrations - Capital and Revenue Commerce Notes | EduRev is a part of the Commerce Course Crash Course of Accountancy - Class 11.
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Illustration 1.

State whether the following transactions are capital expenditure or revenue expenditure. Give reasons :

(i) Rs. 5,200 spent on repairs before using a second-hand car purchased recently.

(ii) During the year Rs. 3,000 were spent on repairing of various machines.

(iii) Freight and cartage on the new machine Rs. 1,200, erection charges Rs. 600.

(iv) A sum of Rs. 4,000 was spent on white-washing and painting the new factory.

(v) Cost of annual white-washing of building.

(Vi) Fire insurance premium was paid on 1st July, 2014 for full one year Rs. 2,400. Books are closed on 31 st March every year.

(Vii) Rs. 20,000 spent towards additions to the machinery.

(viii) Rs. 5,000 were spent in connection with the issue of capital and Rs. 3,000 were incurred as legal expenses in raising a debenture loan.

Solution:

(i) It is capital expenditure and will be debited to Car Account because the expenses have been incurred before the Car is put to use.

(ii) It is revenue expenditure because the expenses have been incurred on the repairs of existing machines. It is an expenditure of routine nature.

(iii) Rs. 1 ,800 is capital expenditure and will be debited to Machinery Account.

(iv) As the factory is white-washed and painted for the first time, it should be treated as capital expenditure and hence debited to factory account.

(v) It is revenue expenditure because it is normal and regular expenditure incurred with a view to maintain the building. Hence it will be debited to Profit & Loss Account.

(vi) Fire insurance premium amounting to Rs. 1,800 (i.e., from 1st July, 2014 to 31st March, 201S) is revenue expenditure and Rs. 600 (i.e., from 1st April, 201S to 30th June, 201S) is a prepaid expense and will be charged to next year's revenue.

(vii) It is capital expenditure, since it will result in an increase in the earning capacity of the business.

(viii) Rs. 8,000 is capital expenditure since it is incurred on raising of capital for the business.


Illustration 2.

Classify the following into Capital, Revenue and Deferred Revenue expenditure, stating reasons in each case :

(1) A company removed their factory to more suitable site and incurred the following expenditure :

(i) Cost of dismantling, removing and re-installing the plant 25,000.

(ii) Removal of stock from the old factory to new site cost 10,000.

(2) Before removal to the new site a machine which stood in the books at Rs. 30,000 was found obsolete and sold as scrap for Rs. 8,000. A new machine was installed in its place at the new site at a cost of Rs. 50,000.

(3) While the construction offactory building at new site was in progress, few huts were built for the labour costing Rs. 8,000 which were demolished after the completion of the factory.

(4) A sum of Rs. 40,000 was spent in overhauling its entire plant which resulted in adding five years to its working life.

(5) Rs. 10 Lac spent on the construction of railway sidings.

(6) Rs. 50,000 spent on experimenting on a chemical product which did not result in success.

Solution:

(1) When the factory is removed to a more convenient site, the expenses should be treated as deferred revenue expenditure because the benefit from removal is long lasting. Therefore, Rs. 25,000 plus 10,000 should be put to a Suspense Account and only a portion, say one-fourth, charged to the P & L Account every year.

(2) The loss on sale of old machinery Rs. 22,000 is a revenue expenditure and should be charged to Profit & Loss Account. The cost of new machine Rs. 50,000 is capital expenditure.

(3) It is capital expenditure because it is incurred for the purpose of constructing the factory. Hence it should be debited to Building Account.

(4) It is capital expenditure since it has resulted in increase of the working life of the asset.

(5) It is capital expenditure since an asset is created which will be used for a number of years.

(6) It should be treated as deferred revenue expenditure so that the entire burden may not fall on one year.


Illustration 3.

State, which of the following receipts would be treated as capital receipts and revenue receipts. Give reasons.

(i) Received Rs. 5,00,000 from the issue of shares and the expenses of issue amounted to Rs. 10,000.

(ii) Received Rs. 1,00,000 as subsidy from State Government.

(iii) Compensation received from Improvement Trust for compulsory removal of business to another place.

(iv) Investments which were purchased in 2007 for Rs. 10 Lac sold in 2015 for 12 Lac.

(v) For the welfare of employees, a recreation centre was constructed at a cost of Rs. 8 Lac; Rs. 5 Lac was received from the State Govt. as grant for its construction.

Solution:

(i) Rs. 5,00,000 is capital receipt and expenses of issue amounting to Rs. 10,000 is a capital expenditure since it is incurred in raising capital for the business.

(ii) It is a revenue receipt because it is received in the normal course of business and reduces the cost of production of the goods produced by the firm.

(iii) It is a revenue receipt since it will reduce the cost of removing the business to another place.

(iv) 12 Lac is capital receipt because it is the sale proceeds of a fixed asset 2 Lac is capital gain.

(v) 8 Lac is capital expenditure since it is spent on the construction of building Grant of 5 Lac is a capital receipt.

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