13. Capital and Revenue Expenditure

Question 1

Explain capital expenditure.

Answer 1

An outlay which benefits that business current and future periods. E.g. purchase of non-current asset.

Question 2

Give two examples of capital expenditure.

Answer 2

Any two

1. Purchase of delivery van for business use (or any NCA)
2. Installation cost of new machinery
3. Extension of premises or major upgrading of NCA

Purchase of office equipment and purchase of van is considered as one example

Question 3

Explain revenue expenditure.

Answer 3

An outlay which benefits the business one year or less. E.g. payment of operating expenses.

Question 4

Give two examples of revenue expenditure.

Answer 4

Any two:

1. Payment of salaries (or any operating expenses)
2. Maintenance of non-current assets
3. Immaterial items which may benefit many years e.g. hole puncher
4. Purchase of current assets e.g. inventory

Question 5

State two differences between capital and revenue expenditure

Answer 5

1. Capital expenditure benefits more than one year; revenue expenditure benefits one year or less.
2. Capital expenditure is recorded as a Non-Current Asset; revenue expenditure is recorded as an expense or current asset

Question 6

Identify if the following is capital or revenue expenditure and state why.

a) Purchase of new car for business manager.
b) Paid for the certificate of entitlement of the new car.
c) Bought car cushion for the new car.
d) Bought air freshener for the new car.

Answer 6

a) Purchase of new car for business manager.
Capital Exp = car is a NCA which benefits many years.
b) Paid for the certificate of entitlement of the new car
Capital Exp = COE is a nec cost to own the NCA
c) Bought car cushion for the new car.
Revenue Exp = immaterial cost
d) Bought air freshener for the new car.
Revenue Exp = immaterial and last only short term

Question 7

State if the following is capital or revenue; give reason

Paid for cleaning of new office

Answer 7

Revenue Expenditure

Cleaning benefits only short term

Question 8

State if the following is capital or revenue; give reason

Paid for goods for resales purposes

Answer 8

Revenue Expenditure

Inventory is current asset benefiting only short term.

Question 9

State if the following is capital or revenue; give reason

Bought new machinery for production of goods.

Answer 9

Capital Expenditure

Machinery is a NCA benefiting many years.

Question 10

State if the following is capital or revenue; give reason

Paid for installation of new machinery

Answer 10

Capital Expenditure

Cost necessary to start the use of the NCA.

Question 11

State if the following is capital or revenue; give reason

Signed maintenance contract on new machinery for a year.

Answer 11

Revenue Expenditure

Maintenance cost is normal operating cost to keep NCA in working condition.

Question 12

State if the following is capital or revenue; give reason

Paid for new engine in existing machine to increase its production capacity

Answer 12

Capital Expenditure

Upgrading cost that increases NCA capacity, benefiting more than one accounting period.

Question 13

State if the following is capital or revenue; give reason

Replace existing escalator in mall.

Answer 13

Capital Expenditure

Major overhaul that benefit more than one accounting period.

Question 14

State if the following is capital or revenue; give reason

Repairs to existing escalator at basement

Answer 14

Revenue Expenditure

Repairs is only for maintenance to bring NCA to its normal working state.

Question 15

State if the following is capital or revenue; give reason

Paid for delivery of goods to customers

Answer 15

Revenue Expenditure

Normal business operating cost.

Question 16

Joan paid for the following when she bought her new computer:

a) Cost of computer $2 000
b) Installation of Microsoft office software $200
c) Computer bag $18
d) Various computer accessories $40

How should Joan record these costs

Answer 16

Capital expenditure:
Cost of computer and installation of MS Office software
Revenue expenditure: Computer bag + accessories

Dr Office Equipment $2 200
Dr General expenses $58
Cr Cash at Bank $2 258

Question 17

Peter bought a machine from Germany and the bill from GG Metal Ware was as follows:
a) Cost of machine $18 000
b) Manpower cost to set up and test run $ 3 000
c) On-Site maintenance (1 year) $ 500
d) Freight and insurance $ 1 200
Give the double entries to record the bill

Answer 17

Capital expenditure:
Cost of machine, set up, freight and insurance
Revenue: on-site maintenance

Dr Machine $22 200
Dr Maintenance of machine $ 500
Cr Other Payable - GG Metal Ware $22 700

Question 18

State the type of error when business records capital expenditure as a revenue expenditure.

Answer 18

Error of Principle

Question 19

State how profit and asset will be affected if capital expenditure is wrongly recorded as revenue expenditure

Answer 19

Profit will be understated

Non-current asset will be understated.

Question 20

State how profit and asset will be affected if revenue expenditure is wrongly recorded as capital expenditure.

Answer 20

Profit will be overstated

Non-current asset will be overstated.

Question 21

John debited maintenance of his delivery van, $400 to the motor van account. Explain how this error affects the financial statements.

Answer 21

income statement:
Expense will be understated by $400; Profit is overstated by $400
Balance sheet:
Equity (profit) is overstated by $400
Non-current asset (Motor vehicle) is overstated by $400.

Question 22

Javier paid for a new equipment, $6000. The bookkeeper debited general expense and credited cash at bank. Explain how this error affects the financial statements.

Answer 22

Income statement:
Expense will be overstated by $6 000.
Profit is understated by $6 000.
Balance Sheet:
Equity (profit) is understated by $6 000.
Non-current asset (equipment) is understated by
$6 000.