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CMA Foundation · Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship

Meera Traders spent Rs 1,20,000 on a major overhaul of a machine, which increased its capacity by 25 percent, and Rs 15,000 on annual servicing. Machine book value before these was Rs 5,00,000. Ignoring depreciation, what is the machine's amount in the Balance Sheet and the charge to Profit and Loss on these items?

The machine is shown at Rs 6,20,000 and Rs 15,000 is charged to Profit and Loss. The overhaul raised capacity, so it is capital expenditure added to the asset, while annual servicing only maintains the machine and is revenue expenditure.

  1. ARs 6,35,000 and Rs nil
  2. BRs 5,00,000 and Rs 1,35,000
  3. CRs 5,15,000 and Rs 1,20,000
  4. DRs 6,20,000 and Rs 15,000Correct

Explanation

The overhaul increases capacity, so it is capital: 5,00,000 + 1,20,000 = 6,20,000. The annual servicing of Rs 15,000 is revenue and is charged to Profit and Loss. Option with Rs 6,35,000 wrongly capitalises servicing too.

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