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

Verma Ltd. incurred the following in a year: Rs 1,20,000 on replacing an old engine with a new one that increases capacity, Rs 18,000 on routine servicing, and Rs 30,000 on painting the factory wall. Profit before these items was Rs 5,00,000. If all are correctly treated, what is the profit?

Profit is Rs 4,52,000. The Rs 1,20,000 engine replacement raises capacity and is capital expenditure, so it is not charged. Only routine servicing of Rs 18,000 and painting of Rs 30,000 are revenue expenses, totalling Rs 48,000, deducted from Rs 5,00,000.

  1. ARs 3,32,000
  2. BRs 4,52,000Correct
  3. CRs 3,80,000
  4. DRs 3,62,000

Explanation

Engine replacement increasing capacity is capital, so no charge to profit. Servicing 18,000 and painting 30,000 are revenue, total 48,000. Profit = 5,00,000 - 48,000 = Rs 4,52,000. Charging the engine as well would give Rs 3,32,000.

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