Case Let - Capital Expenditure & Revenue Expenditure

Raja Ram Ltd., for which you are the Accounts Manager, has removed the works factory to a more suitable site. During the removal process the following stream of expenditure were incurred: (i) A sum of Rs.47,500 was spent on dismantling, removing and reinstalling plant, machinery and fixtures. (ii) The removal of stock from old works to new works cost Rs.5,000. (iii) Plant and machinery which stood in books at Rs.7,50,000 included a machine at a book value of Rs.15,000. This being obsolete was sold off for Rs.5,000 and was replaced by a new machine which costs Rs.24,000. (iv) The fixtures and furniture appeared in the books at Rs.75,000. Of these some portion of the book value of Rs.15,000 was discarded and sold off for Rs.16,000 and new furniture of the value of Rs.12,000 was acquired. (v) A sum of Rs.11,000 was spent on painting the new factory. Your accounts clerk has come to you seeking your help to classify the above expenditure as to capital expenditure and revenue expenditure. Advise him.

Solution:
(i) Rs.47,500 will have to be treated as revenue expenditure. It may be treated as deferred revenue expenditure item and spread over a term of years say four to five years. (ii) The cost of removal of stock from the old works to the new works does not either add to the value of the profit earning capacity of the asset and as such it should be treated as an item of revenue expenditure. (iii) Rs.10,000 the difference between the book value of the machine sold and the amount realised on sale, will have to be charged off to revenue as depreciation. Rs.24,000, the cost of new machine, will have to be capitalised. (iv) Rs.1,000 the difference between the book value of the fixtures and fittings discarded and the amount realised there from will be treated as capital profit and therefore be credited to capital revenue account. Rs.12,000 the cost of new furniture, will be capitalised. (v) A sum of Rs.11,000 spent on painting a new factory is capital expenditure and will be added to the cost of factory building as it is all to the new factory.