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

Gupta & Sons paid Rs 30,000 as legal fees: Rs 18,000 for drafting the conveyance deed on purchase of a godown and Rs 12,000 for defending a customer's suit over a trade debt. Which treatment is correct?

Rs 18,000 for the conveyance deed is capital expenditure because it is part of acquiring the godown, whereas Rs 12,000 for defending a trade debt suit is revenue expenditure charged to the Profit and Loss Account.

  1. ARs 18,000 capital expenditure and Rs 12,000 revenue expenditureCorrect
  2. BRs 30,000 capital expenditure
  3. CRs 30,000 revenue expenditure
  4. DRs 12,000 capital expenditure and Rs 18,000 revenue expenditure

Explanation

Legal charges for acquiring property are part of the asset's cost, so Rs 18,000 is capitalised. Legal expenses for a routine trading dispute are revenue expenditure, so Rs 12,000 goes to the Profit and Loss Account. Treating all as capital would overstate the godown.

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