CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions
Rao Industries purchased a machine for Rs 3,00,000. It paid Rs 12,000 for transportation to the factory, Rs 8,000 for installation, Rs 5,000 for a trial run, and Rs 6,000 for routine annual maintenance during the first year of use. At what value should the machine be capitalised?
The machine is capitalised at Rs 3,25,000, being purchase price plus transport, installation and trial run costs. Routine maintenance of Rs 6,000 is a revenue expense because it only keeps the machine working and does not bring it into usable condition.
- ARs 3,20,000
- BRs 3,25,000Correct
- CRs 3,31,000
- DRs 3,00,000
Explanation
Capitalised cost = 3,00,000 + 12,000 transport + 8,000 installation + 5,000 trial run = Rs 3,25,000. Routine maintenance of Rs 6,000 is a revenue expense of running the asset. Rs 3,31,000 wrongly includes maintenance, and Rs 3,20,000 omits the trial run.
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