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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Sharma Traders spent Rs 40,000 on a second-hand machine and Rs 6,000 on its overhauling before it was put to use, so that it could be made fit for operation. It also paid Rs 2,000 for routine lubrication in the first month of use. What amount is capitalised as the cost of the machine?

The machine is capitalised at Rs 46,000, being the purchase price of Rs 40,000 plus Rs 6,000 overhauling needed to make it ready for use. The Rs 2,000 lubrication is a routine running expense of revenue nature and is charged to the Profit and Loss Account.

  1. ARs 40,000
  2. BRs 48,000
  3. CRs 42,000
  4. DRs 46,000Correct

Explanation

Overhauling needed to bring a second-hand machine into working condition is part of its cost: 40,000 + 6,000 = Rs 46,000. Lubrication of Rs 2,000 is a routine running expense and goes to the Profit and Loss Account. Rs 48,000 wrongly capitalises lubrication too.

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