Practice Questions: Capital And Revenue Expenditures and Receipts

Q1: Write short note on Capital Expenditure and Revenue Expenditure.
Ans:
Capital Expenditure: This refers to amounts spent for acquiring assets or benefits that will serve the business for several years. The advantage from such spending does not end within a single accounting period. Examples include purchase of machinery, construction of a building, or major improvements that enhance earning capacity. Such expenditure is shown as an asset and is written off gradually.
Revenue Expenditure: Revenue expenditure provides benefit only for the current accounting year. These expenses help in maintaining the normal operational efficiency of the business and do not create enduring assets. Examples include repairs, salaries, rent, or routine maintenance. Such expenses are charged to the Profit & Loss Account.

Q2: Distinguish between Capital Receipts and Revenue Receipts.
Ans:

Q3: State with reasons whether the statement is True or False:
Expenses incurred for obtaining a license to run a cinema hall are revenue expenditure.
Ans: False: The cinema hall cannot operate without a license. The amount spent for obtaining the license is a pre-operative expenditure, which is capitalized. Hence, it is treated as capital expenditure, not revenue expenditure.

Q4: State True or False: Overhauling expenses of a motor car to improve fuel efficiency is revenue expenditure.
Ans: False: Overhauling improves long-term operating efficiency and reduces future running costs. Since the benefit lasts for years, the expenditure is capitalized and treated as capital expenditure.

Q5: State whether True or False:
Amount spent on temporary huts constructed for the Cinema House project is capital expenditure.
Ans: True: Temporary huts used during the construction process form part of the total construction cost. Hence, their cost is included in capital expenditure.

Q6: State whether the statement is True or False:
Renovation expenses of a café treated as revenue expenditure are correct.
Ans: False: Renovation increased the number of cabins and enhanced earning potential. Since this improves revenue-generating capacity, the amount is a capital expenditure, not revenue expenditure.

Q7: State whether True or False:
Insurance claim received for machinery destroyed by fire is a capital receipt.
Ans: True: The claim arises due to loss of a fixed asset and not from regular business activities. Therefore, it is a capital receipt.

Q8: State whether the statement is True or False:
Subsidy received from the government for working capital is a revenue receipt.
Ans: True: The subsidy helps meet daily operational expenses. Since it supports routine activities, it is classified as a revenue receipt.

Q9: State whether True or False:
Expenses spent on replacing worn-out parts of a machine are capital expenditure.
Ans: False: Replacement of damaged or worn-out parts only helps maintain the machine's existing efficiency. Since it does not create additional benefits, it is treated as revenue expenditure.

Q10: State whether True or False: Overhaul expenses of second-hand machinery purchased are revenue expenditure.
Ans: False: Overhauling is necessary to make the second-hand machine functional and gain long-term service from it. Hence, such expenditure is capitalized as capital expenditure.