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

Rohan Foods Ltd. spent Rs 5,00,000 on a heavy advertising campaign to launch a new brand. Management expects the benefit to last 5 years and decides to write it off equally over the benefit period. What amount will be charged to the Profit and Loss Account in the first year, and what balance will be carried forward at the end of that year?

Rs 1,00,000 is charged to the Profit and Loss Account in year one, being Rs 5,00,000 spread over 5 years. The remaining Rs 4,00,000 is carried forward as deferred revenue expenditure in the Balance Sheet, to be written off over the next four years.

  1. ARs 1,00,000 charged; Rs 4,00,000 carried forwardCorrect
  2. BRs 5,00,000 charged; nil carried forward
  3. CRs 1,00,000 charged; Rs 5,00,000 carried forward
  4. DRs 4,00,000 charged; Rs 1,00,000 carried forward

Explanation

Yearly write-off = 5,00,000 / 5 = Rs 1,00,000. Balance carried forward = 5,00,000 - 1,00,000 = Rs 4,00,000. Option B treats the whole amount as ordinary revenue expense, and option C fails to reduce the balance after the write-off.

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