Question

ES-15 (project of learning 1) way to distinguish between capital expenditure and expenses [5 to 10 min] consider the following expenses to) purchase price b) recurrent ordinary repairs to keep the machinery in good condition of operation c). Lubrication until the machinery was put into service d) periodic lubrication once the machinery is put into service e) major maintenance to extend three-year shelf life f) sales tax paid on the purchase g price) transport and insurance ((while the machinery is in transit from the seller to the purchaser h) installation i) training of staff for the initial operation of the machinery j) income tax paid on the profit obtained from the sale of manufactured goods by the machinery. Required classify each of these expenses as capital expenditures or costs associated with machinery.

Answer 1

GIven ES-15 (project of Learning) way to distinguish between capital expenditure and revenue expenditure

As per International Acoounting Standard 16 an asset of property, plant and equipment shall be recorded at cost. Cost of an asset includes all costs required to bring the asset to working condition for its intended use. Therefore Cost of an asset includes not only original purchase price but also costs of site preparation, delivery and handling charges, installation charges, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site.

a) Purchase price of machinery is a CAPITAL EXPENDITURE.

b) Generally Ordinary repairs to keep the machinery in a good condition of operation is REVENUE EXPENDITURE i.e., associated with machinery.

c) All the expenses prior to its operation should be capitalised. there fore Lubrication until the machinery was put into service can be capitalised to machinery value.

d) Periodic lubrication once the machinery is put into service - is costs associated with machinery

e) Major maintenance to extend three-year shelf life - is treated as Capital expenditure since the benefit from such expenses was extended to 3 years

f)  sales tax paid on the purchase price if irrecoverable from government then the same should be added back to asset account as it is a capital expenditure.

g) Transport and insurance incured prior to installation of machinery is a CAPITAL EXPENDITURE.

h) Installation charges are added to cost of machinery since they are CAPITAL EXPENDITURES

i) Training of staff for the initial operation of the machinery - is treated as costs associated with machinery also they are revenue expenses since the initial training costs are not necessary to get the asset ready for use.

j) Income tax paid on the profit obtained from the sale of manufactured goods by the machinery - is neither capital expenditure nor costs associated with machinery, it is a revenue expenditure