CA Foundation · Accounting · Final Accounts of Sole Proprietors
Which one of the following expenditures incurred by a trading firm is a capital expenditure?
Legal fees paid to acquire the title deed of a new shop building are capital expenditure because they are necessary to bring the asset into use and form part of its cost. Repairs, insurance and salary are routine revenue expenses charged to the profit and loss account.
- ARepairs to a delivery van to keep it in working order
- BLegal fees paid to acquire the title deed of a new shop buildingCorrect
- CAnnual fire insurance premium on the stock
- DSalary paid to the shop manager
Explanation
Legal fees incurred to acquire the title of a building are part of the cost of acquiring the asset, so they are capitalised. Van repairs, insurance premium and salary only maintain the existing operations and benefit the current year, so they are revenue expenses.
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