Question

The following have been bifurcated into capital expenditure or revenue expenditure. Are the
classifications correct? In either case- yes or no, please giving reasons for the same.

Revenue Expenditure:
a. Annual maintenance charges for the machinery
b. Buying additional factory space for installing machinery
c. Modification to machinery to increase its efficiency
d. Buying a new delivery van
e. Changing the tires of the old delivery van

Capital Expenditure:
a. New engine in the old delivery van
b. Paying a driver to drive the delivery van on a full-time basis
c. Paying rent for a parking space for the van
d. Acquiring a patent to diversify your business
e. Amortization of the patent

Answer 1

Q:Part 1-Is it Revenue Expenditure?

	Yes/No	Nature of Expenditure	Reasons
(a)Annual Maintenance Charges for the Machinery	Yes	Revenue Expenditure	This is because Annual Maintenance Charges does not increase the earning capacity of the machines but only maintains it.
(b).Buying additional factory space for installing machinery	No,its not a Revenue Expenditure	Capital Expenditure	This is an addition to the Fixed Asset(Factory&Buildings) and as a result of this expenditure, the value of the factory has increased,so it is a capital expenditure.
(c).Modification to machinery to increase its efficiency	No,its a Capital Expenditure	Capital Expenditure	Modification to the machinery that has improved its standard of Performance (Efficiency-Output) is to be treated as Capital Expenditure as laid down in AS-10.Its an expenditure that increases the value and profit-earning capacity of the machine. [Expenditure that improves the standards of performance of an Existing Asset is to be treated as Capital Expenditure:-Accounting Standard-10]
(d).Buying a new Delivery Van	No,its not a revenue expenditure	Capital Expenditure	Delivery Van is a Fixed Asset that can be used for many years and its utility does not diminish in one year,so it is a Capital Expenditure.
(e).Changing the tires of the old delivery van	Yes	Revenue Expenditure	The Replacement(change) of tires only ensures its running capacity and keeps it fit for road usage.Therefore its a revenue expenditure.Theres no increae in any production capacity of the asset(van).

Part2-Is it Capital Expenditure?

	Yes/No	Nature of Expenditure	Reasons
(a).New Engine in the old delivery van	No,its not Capital Expenditure.	Revenue Expenditure	It does not increase the value of car,it is incurred to put the car back into working condition.
(b).Paying a driver to drive the vehicle van on a full-time basis	No	Revenue Expenditure	These are expenditures(wages) arising on day-to-day basis that are recurring for the running of business activity.
(c).Paying Rent for parking space for the van	No	Revenue Expenditure	It reduces revenue of the business and theres no increase in the value of asset as part of this rent expenditure.
(d).Acquiring a patent to diversify your business	Yes	Capital Expenditure	Amount paid for acquiring patent is always a capital expenditure it being an intangible asset and its benefits extends for many years.
(e).Amortisation of the patent	Yes	Capital Expenditure	Patents are intangible assets,whose benefit is recived for many years,so its amortisation(cost) is treated as capital expenditure.