Question

a), Fixed Assets are required to be recorded at cost upon acquisition. Provide two examples of types of costs that must be included in the initial acquisition cost.

b). What is the difference between Capital Expenditure and Revenue Expenditure? Please do not define either of them – the question asked is for their difference.

c). Provide the name of the Financial Statement that you would expect to find each of the following in: i) Capital Expenditure. ii) Revenue Expenditure

d). Assume that you know the useful life and residual value of a given Fixed Asset – can you determine the depreciation expense just from that information? If not, are there any factor(s) missing?

e). If a business incurs Capital Costs to improve the flooring and painting of their storefront, what kind of cost is this generally referred to as?

Answer 1

a.

Examples:

#) Freight charge: this is carriage inward charge of the fixed asset from the seller’s place to buyer’s place.

#) Installation charge: in order to use the fixed asset (like a machine) it requires some installation or fitting; expenses relating to that should be under installation charge.

b.

No.	Capital expenditure	Revenue expenditure
1.	Examples are fixed assets purchasing,	Examples are payments of salaries and wages.
2.	It gives long-term benefits (more than 1 year).	It gives short-term benefits (maximum 1 year).
3.	Larger amount of involvement, since assets are costlier than salary payment or rent payment.	Smaller amount of involvement, since each revenue expenditure is usually very small in amount.

c.

Capital expenditure: Balance Sheet gives records of capital expenditures. Those expenditures are recorded in the assets side -- such as plant and machinery, furniture and fittings, buildings, etc.

Revenue expenditure: Income Statement gives records of revenue expenditure. Those expenditures are recorded in the Debit side – such as rent expense, salary expense, interest expense, etc.

d.

Answer: No

Depreciation can’t be determined through useful life and residual value (R) only.

Missing: cost price of the fixed asset is mission here

Once it is available, the depreciation expense for the year (D) would be as below:

D = (Cost – R) / useful life

e.

Answer: this is an Improvement Cost.

The amount of it should be capitalised, since it gives benefit for long time.