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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Which of the following expenditures incurred by a trading firm would be treated as capital expenditure?

Legal fees for registering the purchase deed of a new shop are capital expenditure, because they are incurred to acquire the asset and form part of its cost. Repairs, insurance premium and carriage on purchases are routine revenue expenses charged to profit.

  1. ARepairs to an existing delivery van to keep it in running order
  2. BLegal fees paid for registering the purchase deed of a new shop buildingCorrect
  3. CAnnual fire insurance premium on stock
  4. DCarriage paid on goods purchased for resale

Explanation

Legal fees paid to register the title to a building are a cost necessary to acquire the asset, so they are added to the building's cost and are capital expenditure. Ordinary repairs, insurance premium and carriage on purchases are revenue items charged to the Trading or Profit and Loss Account.

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