CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions
Gupta Furniture Ltd. bought a second-hand machine for Rs 1,50,000. It paid Rs 20,000 for repairs needed to make the machine usable and Rs 5,000 for its first year's routine servicing after installation. At what amount should the machine be capitalised?
The machine should be capitalised at Rs 1,70,000, being the purchase price of Rs 1,50,000 plus Rs 20,000 repairs needed to bring it into usable condition. Routine servicing of Rs 5,000 after installation is a revenue expense and is charged to Profit and Loss.
- ARs 1,50,000
- BRs 1,75,000
- CRs 1,70,000Correct
- DRs 1,55,000
Explanation
Repairs to make a second-hand asset usable are capital: 1,50,000 + 20,000 = 1,70,000. Routine servicing of Rs 5,000 is revenue expense charged to Profit and Loss. Rs 1,75,000 wrongly capitalises servicing.
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