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

Nisha Textiles had a net profit of Rs 2,40,000 before the following were examined: (i) Rs 50,000 spent on installing a new air-conditioning plant was debited to Repairs; (ii) Rs 6,000 paid as insurance on goods in transit to customers was debited to Machinery account; (iii) Rs 20,000 of wages for erecting the plant in (i) was debited to Wages. Ignoring depreciation, what is the corrected net profit?

Corrected net profit is Rs 3,04,000. Add back Rs 70,000 of installation and erection wages wrongly expensed, and deduct Rs 6,000 of transit insurance, a revenue selling expense wrongly capitalised, from the original Rs 2,40,000.

  1. ARs 3,04,000Correct
  2. BRs 3,10,000
  3. CRs 2,98,000
  4. DRs 3,16,000

Explanation

Installation cost Rs 50,000 and erection wages Rs 20,000 are capital and were wrongly expensed: add back 70,000. Insurance on goods in transit to customers is a revenue selling expense wrongly capitalised: deduct 6,000. Corrected profit = 2,40,000 + 70,000 - 6,000 = Rs 3,04,000. Rs 3,10,000 ignores the insurance correction.

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