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CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions

Gupta Brothers purchased a second-hand generator for Rs 1,50,000. It paid Rs 20,000 for overhauling it to make it usable, Rs 6,000 for its first year's routine servicing and Rs 4,000 for fuel used in the first month. At what amount should the generator be capitalised?

The generator should be capitalised at Rs 1,70,000, being the purchase price of Rs 1,50,000 plus Rs 20,000 overhauling needed to make it usable. Routine servicing and fuel are running costs, so they are treated as revenue expenses and charged to profit.

  1. ARs 1,50,000
  2. BRs 1,76,000
  3. CRs 1,70,000Correct
  4. DRs 1,80,000

Explanation

Overhauling needed to bring a second-hand asset into usable condition is capital: 1,50,000 + 20,000 = Rs 1,70,000. Routine servicing (Rs 6,000) and fuel (Rs 4,000) are running costs charged to profit. Rs 1,76,000 wrongly includes the servicing and Rs 1,80,000 includes both servicing and fuel.

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