Capital and revenue expenditure/income

Topic 6: Capital and Revenue Expenditure/Income — 50 Hard MCQs

1. A business buys a machine for $48 000. Delivery cost is $1200, installation cost is $2800 and annual maintenance is $900.

What amount should be capitalised as the cost of the machine?

A $48 000
B $49 200
C $52 000
D $52 900

2. A business buys a delivery van for $32 000. It pays road tax of $600, insurance of $900 and sign-writing on the van of $1400 before first use.

What amount should be capitalised?

A $32 000
B $33 400
C $34 000
D $34 900

3. Which item is capital expenditure?

A repairing a machine after normal use
B repainting the office walls
C replacing a broken window
D extending a factory building

4. Which item is revenue expenditure?

A legal fees to buy a new building
B installation cost of new machinery
C annual service charge for machinery
D carriage paid to bring machinery to premises

5. A business pays $5000 to replace a machine part. The replacement increases the machine’s output by 30%.

How should the payment be treated?

A capital expenditure
B drawings
C revenue expenditure
D revenue income

6. A business pays $5000 to repair a machine and restore it to its original working condition.

How should the payment be treated?

A capital expenditure
B capital income
C revenue expenditure
D non-current liability

7. A business buys a building for $300 000 and pays legal fees of $8000 connected with the purchase.

How should the legal fees be treated?

A capital expenditure
B revenue expenditure
C revenue income
D drawings

8. A business pays legal fees of $3000 to recover a trade debt from a customer.

How should the legal fees be treated?

A capital expenditure
B revenue expenditure
C capital income
D current asset

9. A business pays $12 000 to train staff to use a newly purchased machine.

How should the training cost normally be treated?

A capital expenditure
B revenue expenditure
C non-current asset
D capital income

10. A business pays $7000 to improve a delivery van so that it can carry refrigerated goods.

How should the payment be treated?

A capital expenditure
B revenue expenditure
C drawings
D accrued expense

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Which cost should be included in the cost of a non-current asset?

A annual insurance after use begins
B delivery cost to bring asset to business premises
C repair cost after accidental damage
D wages of general office staff

12. Which cost should not be included in the cost of a non-current asset?

A purchase price
B import duties on the asset
C installation cost before use
D routine maintenance after use begins

13. A business buys machinery for $60 000. It wrongly records the whole amount as repairs expense.

What is the effect on profit and non-current assets?

A profit overstated and non-current assets overstated
B profit overstated and non-current assets understated
C profit understated and non-current assets understated
D profit understated and non-current assets overstated

14. A business pays $4000 for repairs but wrongly records it as machinery.

What is the effect on profit and non-current assets?

A profit overstated and non-current assets overstated
B profit overstated and non-current assets understated
C profit understated and non-current assets overstated
D profit understated and non-current assets understated

15. A business pays $20 000 to extend a warehouse but records it as rent expense.

What is the effect?

A profit overstated and assets overstated
B profit overstated and assets understated
C profit understated and assets understated
D profit understated and liabilities overstated

16. A business pays $1800 for ordinary machine maintenance but records it as machinery.

What is the effect?

A profit overstated and non-current assets overstated
B profit understated and non-current assets understated
C profit overstated and current liabilities overstated
D profit understated and non-current assets overstated

17. A business receives $15 000 from selling an old delivery van.

How should the receipt be treated?

A revenue income
B capital income / capital receipt
C trade payable
D sales revenue

18. A business receives $900 rent from subletting part of its warehouse.

How should the receipt be treated?

A capital income
B revenue income
C capital expenditure
D drawings

19. A business receives $50 000 from issuing ordinary shares.

How should this be classified?

A revenue income
B capital receipt
C sales revenue
D profit for the year

20. A business receives $80 000 from a bank loan repayable in five years.

How should this be classified?

A capital receipt and non-current liability
B revenue income and current asset
C revenue income and equity
D capital expenditure and non-current asset

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A business receives $2200 commission from another business.

How should this be classified?

A capital income
B revenue income
C capital introduced
D non-current liability

22. A business sells goods to customers for $64 000.

How should this be classified?

A capital receipt
B revenue income
C owner’s capital
D non-current liability

23. A business receives $6000 when the owner introduces personal cash.

How should this be classified?

A revenue income
B capital introduced
C sales revenue
D other operating income

24. A business pays $3500 for advertising a new product.

How should this be treated?

A capital expenditure
B revenue expenditure
C capital income
D non-current asset

25. A business pays $25 000 for a patent that will be used for 10 years.

How should this be treated?

A capital expenditure
B revenue expenditure
C drawings
D revenue income

26. A business pays $900 to renew an annual software licence.

How should this be treated?

A capital expenditure
B revenue expenditure
C capital receipt
D equity

27. A business pays $18 000 to buy software that will be used for five years.

How should this be treated?

A capital expenditure
B revenue expenditure
C sales revenue
D current liability

28. Which payment is capital expenditure?

A wages of factory workers
B purchase of motor vehicle
C electricity bill
D annual insurance premium

29. Which payment is revenue expenditure?

A purchase of business premises
B cost of installing a machine
C cost of replacing roof with stronger material that extends life
D cost of cleaning the office

30. Which receipt is capital income?

A sale proceeds from old machinery
B cash sales
C commission received
D rent received

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. Which receipt is revenue income?

A proceeds from issue of debentures
B sale of inventory
C owner introduces cash
D sale of non-current asset

32. A business buys a second-hand machine for $20 000. It pays $2500 to overhaul it before it is ready for use.

How should the overhaul cost be treated?

A capital expenditure
B revenue expenditure
C repairs expense only
D drawings

33. A business pays $2500 to overhaul a machine already in regular use because it broke down.

How should the overhaul cost be treated if it only restores original performance?

A capital expenditure
B revenue expenditure
C capital income
D non-current asset revaluation

34. A business pays $10 000 to replace the engine in a delivery van. The new engine extends the van’s useful life by three years.

How should the cost be treated?

A capital expenditure
B revenue expenditure
C finance cost
D revenue income

35. A business pays $10 000 to repair a delivery van after an accident, restoring it to previous condition.

How should the cost be treated?

A capital expenditure
B revenue expenditure
C capital receipt
D owner’s capital

36. A business pays $6000 to decorate a new shop before it opens for trading.

How should the decoration cost normally be treated?

A capital expenditure
B revenue expenditure
C drawings
D revenue income

37. A business pays $6000 to repaint a shop after it has been used for three years.

How should the repainting cost normally be treated?

A capital expenditure
B revenue expenditure
C non-current liability
D capital receipt

38. A business incorrectly treats revenue expenditure of $7000 as capital expenditure. Depreciation of 10% is charged on this amount.

What is the effect on profit for the year?

A profit overstated by $6300
B profit overstated by $7000
C profit understated by $6300
D profit understated by $700

39. A business incorrectly treats capital expenditure of $9000 as revenue expenditure. Depreciation should have been charged at 20% per year.

What is the effect on profit for the year?

A profit overstated by $7200
B profit understated by $7200
C profit overstated by $9000
D profit understated by $9000

40. A business pays $4000 to repair a machine but records it as machinery. Depreciation is charged at 25%.

What is the effect on profit for the year?

A profit overstated by $3000
B profit understated by $3000
C profit overstated by $4000
D profit understated by $1000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A business buys a machine for $50 000. It pays $3000 delivery, $5000 installation and $2000 staff training.

What is the capitalised cost?

A $50 000
B $55 000
C $58 000
D $60 000

42. A business buys a motor vehicle for $24 000 and pays $1000 to paint the business logo before the vehicle is first used.

How should the painting cost be treated?

A capital expenditure
B revenue expenditure
C advertising expense only
D drawings

43. A business pays $1200 to repaint a motor vehicle after two years of use.

How should this be treated?

A capital expenditure
B revenue expenditure
C capital income
D non-current liability

44. Which statement about capital expenditure is correct?

A It is always paid in cash immediately.
B It provides benefit for more than one accounting period.
C It is always shown as an expense in the income statement.
D It always reduces non-current assets.

45. Which statement about revenue expenditure is correct?

A It is expenditure for day-to-day running of the business.
B It is always used to buy non-current assets.
C It is recorded directly in equity.
D It is never paid by bank.

46. Which item is most likely capital expenditure for a restaurant?

A buying tables and chairs for customers
B buying vegetables for meals
C paying electricity bill
D paying monthly wages

47. Which item is most likely revenue expenditure for a restaurant?

A buying cooking equipment expected to last five years
B installing a new kitchen ventilation system
C buying food ingredients for resale as meals
D extending the restaurant building

48. A business receives insurance compensation for loss of inventory.

How should this normally be classified?

A capital income
B revenue income
C capital expenditure
D drawings

49. A business receives insurance compensation for destruction of a machine.

How should this normally be classified?

A capital receipt
B revenue income
C sales revenue
D trade payable

50. A business receives a government grant to help buy a machine.

How should the grant normally be classified?

A capital receipt
B revenue income from sales
C drawings
D revenue expenditure

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. C — $52 000

• Capitalised cost = purchase price + delivery + installation

• = 48 000 + 1200 + 2800

• = $52 000

• Annual maintenance is revenue expenditure, not capital expenditure.

2. B — $33 400

• Capitalised cost = purchase price + sign-writing before first use

• = 32 000 + 1400

• = $33 400

• Road tax and insurance are running costs, so revenue expenditure.

3. D — extending a factory building

• Extending a building improves/expands a non-current asset.

• It gives benefit for more than one accounting period.

• Repairs and repainting are normally revenue expenditure.

4. C — annual service charge for machinery

• Annual servicing is a regular running cost.

• It maintains the machine; it does not improve it.

• Installation and carriage before use are capital expenditure.

5. A — capital expenditure

• The replacement increases output by 30%.

• It improves the machine’s earning capacity.

• Therefore, it is capital expenditure.

6. C — revenue expenditure

• The repair only restores the machine to original working condition.

• It does not improve capacity or extend life.

• Therefore, it is revenue expenditure.

7. A — capital expenditure

• Legal fees directly connected with buying a building are part of the cost of acquiring the asset.

• They are capitalised with the building.

8. B — revenue expenditure

• Legal fees to recover a trade debt relate to normal business operations.

• They are treated as revenue expenditure.

9. B — revenue expenditure

• Staff training is normally treated as a period expense.

• It is not added to the cost of the machine.

• Tiny trap: training may be necessary practically, but it is not normally capitalised.

10. A — capital expenditure

• The van is improved so it can carry refrigerated goods.

• This increases its usefulness/capability.

• Therefore, it is capital expenditure.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. B — delivery cost to bring asset to business premises

• Costs needed to bring the asset to its intended location and condition are capitalised.

• Delivery before use is included in asset cost.

• Annual insurance and repairs after use are revenue expenditure.

12. D — routine maintenance after use begins

• Routine maintenance is revenue expenditure.

• Purchase price, import duties and installation before use are included in asset cost.

13. C — profit understated and non-current assets understated

• Machinery should be capitalised.

• Recording it as repairs makes expenses too high.

• Profit is understated.

• Non-current assets are understated because the machine is missing from assets.

14. A — profit overstated and non-current assets overstated

• Repairs should be an expense.

• Recording repairs as machinery means expenses are too low.

• Profit is overstated.

• Non-current assets are overstated.

15. C — profit understated and assets understated

• Warehouse extension is capital expenditure.

• Recording it as rent expense makes expenses too high.

• Profit is understated.

• Assets are understated because the extension is not capitalised.

16. A — profit overstated and non-current assets overstated

• Ordinary maintenance should be an expense.

• Recording it as machinery reduces expenses.

• Profit is overstated.

• Non-current assets are overstated.

17. B — capital income / capital receipt

• Sale proceeds from a non-current asset are capital receipts.

• They are not sales revenue from ordinary trading.

18. B — revenue income

• Rent received from subletting is income earned from normal operations/other income.

• It is revenue income.

19. B — capital receipt

• Cash from issuing ordinary shares is capital raised.

• It is not revenue or profit.

20. A — capital receipt and non-current liability

• A five-year bank loan provides long-term finance.

• It is a capital receipt and creates a non-current liability.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. B — revenue income

• Commission received is income earned by the business.

• It is revenue income.

22. B — revenue income

• Sale of goods to customers is normal trading income.

• It is revenue income/sales revenue.

23. B — capital introduced

• Cash introduced by the owner increases capital.

• It is not business revenue.

24. B — revenue expenditure

• Advertising is a selling expense.

• It is normally charged to the income statement as revenue expenditure.

25. A — capital expenditure

• A patent provides benefit for several years.

• It is an intangible non-current asset.

• Therefore, it is capital expenditure.

26. B — revenue expenditure

• Annual software licence renewal is a recurring running cost.

• It gives benefit for the current period only.

27. A — capital expenditure

• Software used for five years gives long-term benefit.

• It is treated as an intangible non-current asset.

28. B — purchase of motor vehicle

• A motor vehicle is a non-current asset.

• Buying it is capital expenditure.

29. D — cost of cleaning the office

• Cleaning is a day-to-day running cost.

• It does not create or improve a non-current asset.

30. A — sale proceeds from old machinery

• Sale of old machinery is a capital receipt.

• It is not ordinary sales revenue.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. B — sale of inventory

• Inventory is held for resale.

• Selling inventory is normal trading activity.

• Therefore, it is revenue income.

32. A — capital expenditure

• The machine is second-hand and not ready for use.

• Overhaul before use makes it ready for business operations.

• It is capitalised.

33. B — revenue expenditure

• The machine is already in regular use.

• The overhaul only restores original performance.

• It is revenue expenditure.

34. A — capital expenditure

• The new engine extends the van’s useful life by three years.

• It improves the asset.

• Therefore, it is capital expenditure.

35. B — revenue expenditure

• Accident repair only restores the van to previous condition.

• It does not improve or extend life.

• It is revenue expenditure.

36. A — capital expenditure

• Decoration before opening helps bring the shop into usable condition.

• It is part of preparing the premises for use.

• Therefore, it is normally capitalised.

37. B — revenue expenditure

• Repainting after three years is maintenance.

• It restores appearance rather than creating a new asset.

• It is revenue expenditure.

38. A — profit overstated by $6300

• Correct treatment: expense $7000.

• Wrong treatment: capitalise $7000 and depreciate 10% = expense only $700.

• Expense understated by 7000 – 700 = $6300.

• Profit overstated by $6300.

39. B — profit understated by $7200

• Correct treatment: capitalise $9000 and charge depreciation of 20%.

• Correct expense = $1800.

• Wrong treatment: full $9000 charged as expense.

• Expense overstated by 9000 – 1800 = $7200.

• Profit understated by $7200.

40. A — profit overstated by $3000

• Correct treatment: repair expense = $4000.

• Wrong treatment: capitalised as machinery and depreciated at 25%.

• Wrong expense = 25% × 4000 = $1000.

• Expense understated by 4000 – 1000 = $3000.

• Profit overstated by $3000.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. C — $58 000

• Capitalised cost = purchase price + delivery + installation

• = 50 000 + 3000 + 5000

• = $58 000

• Staff training is revenue expenditure.

42. A — capital expenditure

• Logo painting/sign-writing before first use prepares the vehicle for business use.

• It is capitalised as part of the vehicle cost.

43. B — revenue expenditure

• Repainting after two years is maintenance.

• It does not improve the asset’s capacity or life.

• It is revenue expenditure.

44. B — It provides benefit for more than one accounting period

• Capital expenditure creates, acquires or improves a non-current asset.

• It gives long-term benefit.

45. A — It is expenditure for day-to-day running of the business

• Revenue expenditure is used for normal daily operations.

• It is charged to the income statement.

46. A — buying tables and chairs for customers

• Tables and chairs are non-current assets.

• They will be used for more than one accounting period.

• Therefore, capital expenditure.

47. C — buying food ingredients for resale as meals

• Food ingredients are part of normal trading activity.

• They are used to generate revenue in the current period.

• Therefore, revenue expenditure.

48. B — revenue income

• Compensation for inventory replaces trading stock lost.

• Inventory relates to normal trading.

• Therefore, compensation is revenue income.

49. A — capital receipt

• Compensation for destruction of a machine replaces a non-current asset.

• It is treated as a capital receipt.

50. A — capital receipt

• A grant to help buy a machine relates to financing a non-current asset.

• It is treated as a capital receipt, not sales revenue.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.