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

Iyer Stores paid Rs 25,000 as brokerage and legal charges while purchasing a shop building for Rs 8,00,000, and Rs 6,000 as property tax for the first year of use. At what amount will the building be shown, and how is the property tax treated?

The building is shown at Rs 8,25,000, being the price plus Rs 25,000 brokerage and legal charges incurred to acquire it. The Rs 6,000 property tax is a recurring cost of using the building, so it is revenue expenditure charged to profit and loss.

  1. ARs 8,25,000; property tax is revenue expenditureCorrect
  2. BRs 8,31,000; property tax is capital expenditure
  3. CRs 8,00,000; property tax is revenue expenditure
  4. DRs 8,25,000; property tax is capital expenditure

Explanation

Brokerage and legal charges incurred to acquire the building form part of its cost: 8,00,000 + 25,000 = Rs 8,25,000. Property tax is a recurring cost of using the property, so it is revenue expenditure. Rs 8,31,000 wrongly capitalises it.

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