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ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal

A company pays $40,000 to install and commission a new machine and a further $6,000 to repaint its existing factory walls. Which statement correctly classifies this expenditure?

The $40,000 for installing and commissioning the machine is capital expenditure because it brings a new asset into use. The $6,000 repainting of existing walls is revenue expenditure because it only maintains an existing asset and gives no new future capability.

  1. ABoth amounts are capital expenditure
  2. BThe $40,000 is capital expenditure and the $6,000 is revenue expenditureCorrect
  3. CThe $40,000 is revenue expenditure and the $6,000 is capital expenditure
  4. DBoth amounts are revenue expenditure

Explanation

Installation and commissioning costs needed to bring a machine into use are part of its cost and so are capital expenditure. Repainting existing walls only maintains the existing asset and is revenue expenditure. Treating both as capital would overstate assets.

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