CA Foundation · Accounting · Theoretical Framework
Which of the following expenditures of a business should be recognised as an expense rather than capitalised as an asset in the year of incurrence, because no future economic benefit is expected beyond the current period?
Repairs and maintenance that only maintain existing earning capacity are expensed in the year incurred. Installation wages, legal fees for acquiring title and import duty on machinery are costs of acquiring and preparing the asset for use, so they are added to the asset's cost.
- AWages paid to workers for installing a new plant
- BRepairs and maintenance that merely maintain the existing earning capacity of machineryCorrect
- CLegal fees paid to acquire title to a purchased building
- DImport duty paid on machinery brought into the factory
Explanation
Routine repairs only maintain the existing level of performance and do not add future benefits, so they are revenue expenses. Installation wages, legal fees for acquiring title and import duty are all costs necessary to acquire or bring the asset into use, so they are capitalised.
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