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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Rajan Pharma Ltd. buys a machine for ₹5,00,000. During the year it spends ₹20,000 on routine repairs and ₹30,000 on a replacement part that extends the machine's useful life and was not previously anticipated. Under the Framework's recognition criteria, an item of expenditure is recognised as an asset when future economic benefits are probable and cost can be measured reliably. The amount of the year's expenditure (excluding the machine's purchase price) that should be capitalised is:

₹30,000 should be capitalised. The replacement part extends the machine's useful life, giving additional probable future economic benefits with reliably measurable cost. Routine repairs of ₹20,000 merely maintain existing performance and are charged to the Statement of Profit and Loss as expenses.

  1. A₹30,000Correct
  2. B₹50,000
  3. C₹20,000
  4. DNil

Explanation

The replacement part extends useful life, so it brings probable future benefits beyond the original standard and is capitalised at ₹30,000. Routine repairs of ₹20,000 only maintain the existing level of benefits and are expensed. Capitalising ₹50,000 wrongly includes repairs.

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