Chp 11 : Capital and Revenue Expenditure

Question 1

State the journal entry when business bought tables on credit

Answer 1

Question 2

Explain the differences between capital expenditure and revenue expenditure

Answer 2

NCA: Cost to buy and bring the non-current assets to their intended use. RE is Cost to operate, repair and maintain non-current assets in working condition.

NCA: Cost to enhance the non-current assets and Provide benefits for more than one year. RE provides ide benefits which will be used within one year

Question 3

Define Materiality Theory

Hint (think of $2 paper clips, can use for more than 1 year, BUT…)

Answer 3

Relevant information should be reported in the financial statements

if it is likely to make a difference to the decision-making process.

Application: if the amount spent on a non-current asset is insignificant to decision-making when compared to the size of the income, profit, assets or equity of the business,

then it can be classified as revenue expenditure

Question 4

What is the effect on profit if Capital Expenditure is WRONGLY recorded as Revenue Expenditure.

(Hint: by right it is a NCA but recorded as expense)

Answer 4

Expenses overstated-→ so profit understated

Question 5

What is the effect on profit if Revenue Expenditure is WRONGLY recorded as Capital Expenditure.

(Hint: by right it is a Expense but recorded as NCA)

Answer 5

Expenses understated-→ so profit OVERSTATED

Question 6

Is this Capital or Revenue Expenditure?

Installation costs for the new machinery

Answer 6

Capital Expenditure

Question 7

Is this Capital or Revenue Expenditure?

Painting of logo on business van

Answer 7

Capital Expenditure

Question 8

Is this Capital or Revenue Expenditure?

Petrol for motor vehicle

Answer 8

Revenue Expenditure