ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
Which of the following items of expenditure should be treated as capital expenditure in the financial statements of a manufacturing company?
Legal fees on buying a factory building are capital expenditure because they are directly attributable to acquiring the asset. Routine repainting, replacing a worn belt and annual servicing only maintain existing capacity and are therefore charged as revenue expenses in profit or loss.
- ARepainting the factory walls as part of routine maintenance
- BLegal fees incurred in purchasing a new factory buildingCorrect
- CReplacing a worn belt on a production machine
- DAnnual servicing of delivery vehicles
Explanation
Costs necessary to bring a non-current asset into the business, such as legal fees on acquiring a building, are capitalised. Repainting, replacing a worn part and servicing merely maintain existing earning capacity, so they are revenue expenditure.
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