Classify the following expenditures as capital or revenue expenditure/ receipt: (i) An extension of railway tracks in the factory area. (ii) Amount...

Question

Classify the following expenditures as capital or revenue expenditure/ receipt: (i) An extension of railway tracks in the factory area. (ii) Amount spent on painting the factory. (iii) Payment of wages for building a new office extension. (iv) Premium received on issue of shares. (v) Rings and Pistons of an engine were changed to get full efficiency. (vi) Legal fees paid to acquire a property. [RTP Jan. 2025]

Accepted Answer

Option : Correct Option. Solution: (i) Expenses incurred for extension of railway tracks in the factory area should be treated as a Capital Expenditure because it will yield benefit for more than one accounting period. (ii) Painting of the factory should be treated as a Revenue Expenditure because it has been incurred to maintain the factory building. (iii) Payment of wages for building a new office extension should be treated as a Capital Expenditure. (iv) Premium received on issue of shares is an example of capital receipt. (v) Expenditure incurred for changing Rings and Pistons of an engine is a Revenue Expenditure because, the change of rings and piston will restore the efficiency of the engine only and it will not add anything to the capacity of the engine. (vi) Legal fees paid to acquire a property is a part of the cost of that property. Hence, it is taken as capital expenditure. UNIT – 4 (CONTINGENT ASSETS AND CONTINGENT LIABILITIES)

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