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

Iyer Ltd. had a machine with book value Rs 1,50,000. During the year it incurred: Rs 40,000 on a major overhaul that extends the machine's useful life, Rs 15,000 on replacing small worn parts (routine repair), Rs 10,000 on painting it, and Rs 25,000 on an attachment that raises its output capacity. What amount is revenue expenditure, and what is the machine's book value (before depreciation) after capitalising the proper items?

Revenue expenditure is Rs 25,000 (routine repairs Rs 15,000 plus painting Rs 10,000), and the machine's book value becomes Rs 2,15,000. The overhaul extending life and the capacity-raising attachment, totalling Rs 65,000, are capital expenditure added to Rs 1,50,000.

  1. ARevenue Rs 25,000; book value Rs 2,15,000Correct
  2. BRevenue Rs 25,000; book value Rs 2,40,000
  3. CRevenue Rs 40,000; book value Rs 2,15,000
  4. DRevenue Rs 15,000; book value Rs 2,25,000

Explanation

Capital items: overhaul 40,000 and attachment 25,000 = Rs 65,000, so book value = 1,50,000 + 65,000 = Rs 2,15,000. Revenue items: repair 15,000 + painting 10,000 = Rs 25,000. Check: 65,000 + 25,000 = 90,000, the total spent. Option with 2,40,000 wrongly capitalises painting and repairs too.

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