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

Gupta Traders paid Rs 8,000 as legal fees to a lawyer for drafting the sale deed while buying a shop building. How should this payment be treated in the books?

Legal fees paid for drafting the sale deed of a building are capitalised by adding them to the building's cost. They are incurred to acquire the asset and make it legally owned, so they are capital expenditure and not an expense of the year.

  1. ARevenue expenditure, charged to the Profit and Loss Account
  2. BCapitalised by adding it to the cost of the buildingCorrect
  3. CTreated as a drawing of the proprietor
  4. DTreated as deferred revenue expenditure over five years

Explanation

Legal fees incurred to acquire an asset are necessary to bring the asset into ownership, so they form part of its cost. The building is therefore recorded at purchase price plus Rs 8,000. Charging it to Profit and Loss would understate the asset and profit would be wrongly reduced.

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