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Capital and Revenue Expenditure

Capital and Revenue Expenditure. Capital expenditure. Buy fixed assets or Add to the value of an existing fixed asset. Revenue expenditure. Day-to-day running of business. Think it over. Buying a van Petrol costs for van Repairs to van Putting extra headlights on van Buying machinery

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Capital and Revenue Expenditure

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  1. Capital and Revenue Expenditure

  2. Capital expenditure • Buy fixed assets or • Add to the value of an existing fixed asset

  3. Revenue expenditure • Day-to-day running of business

  4. Think it over • Buying a van • Petrol costs for van • Repairs to van • Putting extra headlights on van • Buying machinery • Electricity costs of using machinery • Painting outside of new building • Three years later – repainting outside the same building

  5. Think it over • A builder was engaged to perform some work on your premises, the total bill being $4,500. If one-third of this was for repair work and two-thirds for improvements, what will be the correct accounting treatment?

  6. Think it over • On 1 January 2009, DEP Tour Operator Limited purchased four second-hand tour buses. The list price of the buses was $500,000 each and the supplier gave a $200,000 trade discount because of the bulk purchase. The payment was to be made through four half-yearly equal instalments of $530,000 each. The company spent a further $1,200,000 on each bus for renovations. The freight charges for the delivery of the buses amounted to $108,000. During installation, an accident happened and the company paid a repair cost of $20,000. In order to legalise the use of the buses as tour buses, an inspection fee of $90,000 was paid. An annual licence fee of $80,000 was also paid. You are required to prepare a statement to calculate the cost of the buses. (HKAL 2001)

  7. Incorrect treatment of expenditure • Capital expenditure is incorrectly treated as revenue expenditure • Revenue expenditure is incorrectly treated as capital expenditure

  8. Capital expenditure is treated as revenue expenditure • Value of fixed asset is understated • Net profit is understated

  9. Revenue expenditure is treated as capital expenditure • Revenue expenditure is treated as capital expenditureValue of fixed asset is overstatedNet profit is overstated

  10. Think it over XYZ Co purchased a new machine at the list price of $250,000. The supplier offered a trade discount of 10%. The supplier also provided that if the company settled the balance within 10 days, a further 10% cash discount would be given. XYZ Co promptly settled the debt, taking the advantage of both discounts. In addition, the company Incurred installation costs of $4,500. The total transportation and insurance cost incurred for the shipment of the machine amounted to $3,000 and $6,000 respectively. $1,200 was paid to the supplier for the maintenance charge for the current year. Explain how each of the above figures should be accounted for by the company. (HKAL 1998)

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