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

Rao Enterprises received Rs 5,00,000 as a government subsidy specifically to buy a machine, and Rs 80,000 as a subsidy to meet its annual running expenses. Which classification is correct?

The Rs 5,00,000 subsidy is a capital receipt because it was given to purchase a machine, a fixed asset. The Rs 80,000 subsidy covers annual running expenses, so it is a revenue receipt credited to profit and loss. The purpose of the grant decides the nature.

  1. ABoth subsidies are capital receipts
  2. BRs 5,00,000 is a capital receipt and Rs 80,000 is a revenue receiptCorrect
  3. CRs 5,00,000 is a revenue receipt and Rs 80,000 is a capital receipt
  4. DBoth subsidies are revenue receipts

Explanation

A subsidy given to acquire a fixed asset is treated as a capital receipt, as it supports the capital structure. A subsidy given to meet routine running expenses supports normal operations and is a revenue receipt. Hence Rs 5,00,000 is capital and Rs 80,000 is revenue.

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