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ACCA Applied Knowledge · Financial Accounting · Tangible non-current assets

Quill Co spent $30,000 on its factory building. The work comprised $18,000 replacing an old roof with a new one that will extend the building's useful life, and $12,000 repainting the walls. How should this be treated?

Capitalise $18,000 for the new roof and expense $12,000 for repainting. The roof extends the building's useful life and gives future economic benefits, so it is capital expenditure. Repainting merely maintains the existing performance of the building, so it is revenue expenditure charged to profit or loss.

  1. ACapitalise $30,000
  2. BCapitalise $12,000 and expense $18,000
  3. CExpense $30,000
  4. DCapitalise $18,000 and expense $12,000Correct

Explanation

Replacing the roof is an improvement or replacement of a component that provides future economic benefit, so it is capital expenditure of $18,000. Repainting only maintains the existing condition, so $12,000 is revenue expenditure. Option $30,000 capitalised wrongly includes the repainting.

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