Commerce Department Baghdad Campus IUB

Capital Expenditure & Revenue Expenditure Practice

Questions
Question #01:
Some of the following items should be treated as capital and some as revenue. For each of
them state which classification applies:
(i) The purchase of machinery for use in the business.
(ii) Carriage paid to bring the machinery in (i) above to the works.
(iii) Complete redecoration of the premises at a cost of Rs.1,500.
(iv) A quarterly account for heating.
(v) The purchase of a soft drinks vending machine for the canteen with a stock of soft drinks.
(vi) Wages paid by a building contractor to his own workmen for the erection of an office in the
builder’s stockyard.

Question #02:
Indicate which of the following would be revenue items and which would be capital items in a
wholesale bakery:
(a) Purchase of a new van.
(b) Purchase of replacement engine for existing van.
(c) Cost of altering interior of new van to increase carrying capacity.
(d) Cost of motor tax for new van.
(e) Cost of motor tax for existing van.
(f ) Cost of painting business’s name on new van.
(g) Repair and maintenance of existing van.

Question #03:
State the type of expenditure, capital or revenue, incurred in the following transactions
(a) Break-down van purchased by a garage.
(b) Repairs to a fruiterer’s van.
(c) The cost of installing a new machine.
(d) Cost of hiring refrigeration plant in a butcher’s shop.
(e) Twelve dozen sets of cutlery, purchased by a catering firm for a new dining-room.
(f ) A motor vehicle bought for re-sale by a motor dealer.
(g) The cost of acquiring patent rights.

Question #04:
State which of the following you would classify as capital expenditure, giving your reasons:
(a) Cost of building extension to factory.
(b) Purchase of extra filing cabinets for sales office.
(c) Cost of repairs to counting machine.
(d) Cost of installing reconditioned engine in delivery van.
(e) Legal fees paid in connection with factory extension.
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Question #05:
The data which follows was extracted from the books of account of Moosa Butt, an engineer,
on 31 March 20X6, his financial year end.
Rs.
(a) Purchase of extra milling machine (includes Rs.300 for repair of an old machine) 2,900
(b) Rent 750
(c) Electrical expenses (includes new wiring Rs.600, part of premises improvement) 3,280
(d) Carriage inwards (includes Rs.150 carriage on new cement mixer) 1,260
(e) Purchase of extra drilling machine 4,100
You are required to allocate each or part of the items above to either ‘capital’ or ‘revenue’
expenditure.

Question #06:
For the business of Zainab Butt, wholesale chemist, classify the following between ‘capital’
and ‘revenue’ expenditure:
(a) Purchase of an extra van.
(b) Cost of rebuilding warehouse wall which had fallen down.
(c) Building extension to the warehouse.
(d) Painting extension to warehouse when it is first built.
(e) Repainting extension to warehouse three years later than that done in (d).
(f ) Carriage costs on bricks for new warehouse extension.
(g) Carriage costs on purchases.
(h) Carriage costs on sales.
(i) Legal costs of collecting debts.
( j ) Legal charges on acquiring new premises for office.
(k) Fire insurance premium.
(l) Costs of erecting new machine.

Question #07:
For the business of Zoya Butt, a food merchant, classify the following between ‘capital’ and
‘revenue’ expenditure:
(a) Repairs to meat slicer.
(b) New tyre for van.
(c) Additional shop counter.
(d) Renewing signwriting on shop.
(e) Fitting partitions in shop.
(f ) Roof repairs.
(g) Installing thief detection equipment.
(h) Wages of shop assistant.
(i) Carriage on returns outwards.
( j ) New cash register.
(k) Repairs to office safe.
(l) Installing extra toilet.
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Question #08:
The following costs were also incurred by Waqar Butt Ltd during the financial year ended 30
June 2023:
(1) Interest on loan to purchase microcomputer.
(2) Cost of software for use with the microcomputer.
(3) Cost of customising the software for use in Waqar Butt Ltd’s business.
(4) Cost of paper used by the computer printer.
(5) Wages of computer operators.
(6) Cost of ribbons used by the computer printer.
(7) Cost of adding extra memory to the microcomputer.
(8) Cost of floppy disks used during the year.
(9) Costs of adding a manufacturer’s upgrade to the microcomputer equipment.
(10) Cost of adding air conditioning to the computer room.
Required:
Classify each of the above as capital expenditure or revenue expenditure.

Question #09:
Classify the following items as either revenue or capital expenditure:
(a) An extension to an office building costing Rs.24,000.
(b) The cost of replacement valves on all the labelling machines in a canning factory.
(c) Repairs to the warehouse roof.
(d) Annual service costs for a courier firm’s fleet of vans.
(e) Replacement of rubber tread on a printing press with a plastic one that has resulted in the
useful economic life of the printing press being extended by three years.
(f ) A new bicycle purchased by a newsagent for use by the newspaper delivery boy.
(g) Repairs to a refrigeration system of a meat wholesaler.
(h) Repainting of the interior of a restaurant which has greatly improved the potential for
finding a buyer for the restaurant as a going concern.
(i) Wages paid to employees who worked on the construction of their company’s new office
building

Question #10:
Humna Butt saw a computer for sale in a local store for Rs.1,499. This was much cheaper than
he’d seen it for sale elsewhere. He needed five of these PCs and also needed the cabling to
network them. Following negotiations with the retailer, he obtained the machines for a total of
Rs.7,000. However, the cost of the cabling was Rs.300 and the supplier was going to charge
Rs.500 to install the network. If Humna Butt paid the total amount due before installation, she
would receive a discount of 2 1/2 per cent. She liked this idea and paid immediately.
Subsequently, she purchased three printers costing Rs.125 each and software costing Rs.350,
together with floppy disks and consumables costing a total of Rs.250. The supplier gave a
discount of Rs.50 on the consumables due to the size of the order.
All of Humna Butt’s staff were sent on a customised training course organised by the retailer at a
total cost of Rs.500.
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Required:
(a) Calculate the amount capitalised in the balance sheet in respect of the computer equipment
and also the amount to be charged to revenue accounts.
(b) ‘Materiality’ is a concept which sometimes has an effect on the capitalisation of amounts
within a balance sheet. Give examples of how this may be done.

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