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

Nair & Sons spent Rs 90,000 on an advertising campaign to launch its regular product in a new city. The benefit is expected to last about three years, but no new asset is created. What is the correct treatment under conventional accounting at this level?

The Rs 90,000 advertising spend is treated entirely as revenue expenditure in the current year. Advertising to sell an existing product creates no identifiable asset, so even though its benefit may last three years, it is charged to the Profit and Loss Account.

  1. ACapitalise the Rs 90,000 as an asset because benefit lasts three years
  2. BTreat the entire Rs 90,000 as revenue expenditure of the current yearCorrect
  3. CCharge Rs 30,000 now and carry the rest as goodwill
  4. DDebit the amount to the proprietor's capital account

Explanation

Ordinary advertising does not create a tangible or recognisable asset, so it is charged to Profit and Loss in the year incurred. The three-year benefit does not make it capital. Spreading it or creating goodwill is not accepted treatment for such a routine expense.

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