Capital and revenue expenditure/receipts, repairs vs improvements, effect on profit and assets

1. A business bought a machine for $40 000. It also paid delivery $1200, installation $1800, annual maintenance $900 and insurance for the first year $600. What amount is capital expenditure?

A $40 000
B $43 000
C $43 900
D $44 500

2. A business replaced a broken part in a machine at a cost of $700. The replacement restored the machine to its original working condition but did not improve output or useful life. How should this be treated?

A Capital expenditure
B Revenue expenditure
C Capital receipt
D Revenue receipt

3. A business paid $5000 to modify a machine. The modification increased output by 30% and extended the useful life by two years. How should this be treated?

A Revenue expenditure because it was paid in cash
B Capital expenditure because it improves the asset
C Revenue receipt because production increased
D Capital receipt because the machine was repaired

4. Repairs costing $1800 were wrongly recorded as capital expenditure. No depreciation is considered. What was the effect?

A Profit overstated and non-current assets overstated by $1800
B Profit understated and non-current assets understated by $1800
C Profit overstated and current assets understated by $1800
D Profit understated and liabilities overstated by $1800

5. Capital expenditure of $3000 was wrongly recorded as revenue expenditure. No depreciation is considered. What was the effect?

A Profit overstated and assets overstated by $3000
B Profit understated and assets understated by $3000
C Profit overstated and liabilities understated by $3000
D Profit understated and current assets overstated by $3000

6. A business paid $2400 to repaint its shop. The repainting did not increase the shop’s value or useful life. How should it be recorded?

A Capital expenditure
B Revenue expenditure
C Capital receipt
D Drawings

7. A business paid $18 000 for a new delivery van. It also paid $700 for road tax and $1100 for annual insurance. What amount should be capitalised?

A $18 000
B $18 700
C $19 100
D $19 800

8. Which item is capital expenditure?

A Cost of repairing office equipment
B Cost of installing new machinery
C Cost of annual machine servicing
D Cost of fuel for delivery vehicles

9. Which item is revenue expenditure?

A Legal costs of buying premises
B Delivery cost of a new machine
C Replacement of a worn tyre on a van
D Cost of extending a warehouse

10. Which item is a capital receipt?

A Sale of goods
B Rent received
C Sale of an old motor vehicle
D Commission 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.

11. Which item is a revenue receipt?

A Proceeds from sale of machinery
B Bank loan received
C Capital introduced by owner
D Cash received from sale of goods

12. A business bought a building for $150 000. Legal fees were $6000 and stamp duty was $4000. Repairs to damage after purchase cost $3000. The repairs were necessary because the building could not be used until completed. What amount should be capitalised?

A $150 000
B $160 000
C $163 000
D $153 000

13. A business bought premises for $200 000. After using them for six months, it paid $8000 for routine repairs. How should the $8000 be treated?

A Capital expenditure
B Revenue expenditure
C Capital receipt
D Reduction in capital

14. A new machine was bought for $25 000. Delivery was $900. Installation was $1600. Training workers to use the machine cost $1200. What amount should be capitalised?

A $25 000
B $26 500
C $27 500
D $28 700

15. A business replaced the engine of a delivery van at a cost of $6000. The replacement increased the van’s useful life and resale value. How should this be treated?

A Revenue expenditure
B Capital expenditure
C Revenue receipt
D Capital receipt

16. A business paid $900 for ordinary servicing of a motor vehicle. How should this be treated?

A Capital expenditure
B Revenue expenditure
C Capital receipt
D Non-current liability

17. Which statement is correct?

A Capital expenditure is always paid in cash.
B Revenue expenditure gives benefit only to the current accounting period.
C Revenue expenditure is recorded as a non-current asset.
D Capital expenditure is always shown in the income statement immediately.

18. Which statement is correct?

A Capital receipts arise from normal trading activities.
B Revenue receipts increase profit from normal business activities.
C Capital receipts are always deducted from purchases.
D Revenue receipts are always shown as liabilities.

19. Sale proceeds of an old machine were wrongly recorded as sales revenue, $4000. The machine had a carrying amount of $3500. What was the effect on gross profit and net profit?

A Gross profit overstated by $4000, net profit overstated by $500
B Gross profit overstated by $500, net profit overstated by $4000
C Gross profit unchanged, net profit understated by $500
D Gross profit overstated by $4000, net profit unchanged

20. A business received $10 000 from selling an old van. The amount was wrongly credited to sales. What is the main error?

A Capital receipt treated as revenue receipt
B Revenue receipt treated as capital receipt
C Capital expenditure treated as revenue expenditure
D Revenue expenditure treated as 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.

21. A trader spent $12 000 extending the shop building. The amount was wrongly debited to repairs. No depreciation is considered. What was the effect?

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

22. A trader spent $750 repairing storm damage to the roof. The amount was wrongly debited to premises. No depreciation is considered. What was the effect?

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

23. Which item should be added to the cost of a non-current asset?

A Delivery cost to bring the asset to the business
B Annual insurance for using the asset
C Routine repairs after one year of use
D Fuel consumed by the asset

24. Which item should not be added to the cost of a non-current asset?

A Purchase price after trade discount
B Installation cost
C Annual maintenance contract
D Import duty on purchase

25. A machine had a list price of $50 000. Trade discount was 10%. Delivery cost was $1500 and installation cost was $2500. What was the capital expenditure?

A $45 000
B $47 500
C $49 000
D $54 000

26. A business paid $3000 to replace wooden windows with stronger security windows. The replacement improved safety and increased the building’s value. How should it be treated?

A Revenue expenditure
B Capital expenditure
C Revenue receipt
D Discount allowed

27. A business paid $3000 to replace broken windows with similar windows after accidental damage. No improvement was made. How should it be treated?

A Revenue expenditure
B Capital expenditure
C Capital receipt
D Discount received

28. The owner withdrew a computer costing $1000 from the business for private use. The computer had a carrying amount of $600. What type of transaction is this?

A Capital receipt
B Revenue expenditure
C Drawings of a non-current asset
D Revenue receipt

29. A business paid $4000 for advertising for the next year. How should this initially be classified?

A Capital expenditure
B Revenue expenditure, with possible prepayment adjustment
C Capital receipt
D Non-current asset purchase

30. A business received $3000 insurance compensation for inventory destroyed by fire. How should it be classified?

A Capital receipt because compensation is unusual
B Revenue receipt because it replaces lost trading inventory
C Capital expenditure because inventory is an asset
D Revenue expenditure because inventory was destroyed

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. A business received $8000 insurance compensation for a machine destroyed by fire. How should it be classified?

A Revenue receipt
B Capital receipt
C Revenue expenditure
D Discount received

32. Goods costing $1500 were used to construct display shelves for the business. No entry was made. What adjustment is needed?

A Debit fixtures, credit purchases
B Debit purchases, credit fixtures
C Debit drawings, credit purchases
D Debit sales, credit purchases

33. Goods costing $600 were used as free samples for customers. No adjustment was made. What adjustment is needed?

A Debit advertising, credit purchases
B Debit fixtures, credit purchases
C Debit purchases, credit advertising
D Debit drawings, credit purchases

34. Goods costing $900 were used to repair the owner’s private house. No adjustment was made. What adjustment is needed?

A Debit repairs, credit purchases
B Debit drawings, credit purchases
C Debit fixtures, credit purchases
D Debit purchases, credit drawings

35. Which error would overstate gross profit but leave net profit unchanged?

A Carriage inwards treated as carriage outwards
B Carriage outwards treated as carriage inwards
C Capital expenditure treated as revenue expenditure
D Revenue receipt treated as capital receipt

36. Which error would understate gross profit but leave net profit unchanged?

A Carriage outwards treated as carriage inwards
B Carriage inwards treated as carriage outwards
C Rent paid treated as capital expenditure
D Sale of old equipment treated as sales revenue

37. A delivery charge of $500 on goods bought for resale was wrongly treated as carriage outwards. What was the effect?

A Gross profit overstated, net profit unchanged
B Gross profit understated, net profit unchanged
C Gross profit unchanged, net profit understated
D Gross profit overstated, net profit overstated

38. A delivery charge of $650 to send goods to customers was wrongly treated as carriage inwards. What was the effect?

A Gross profit overstated, net profit unchanged
B Gross profit understated, net profit unchanged
C Gross profit unchanged, net profit overstated
D Gross profit understated, net profit understated

39. A business bought office furniture for $7000 but debited office expenses. No depreciation is considered. What was the effect?

A Profit overstated and assets overstated by $7000
B Profit understated and non-current assets understated by $7000
C Profit overstated and liabilities understated by $7000
D Profit understated and current assets understated by $7000

40. A business paid $1200 for office cleaning but debited office equipment. No depreciation is considered. What was the effect?

A Profit overstated and non-current assets overstated by $1200
B Profit understated and non-current assets understated by $1200
C Profit overstated and current liabilities overstated by $1200
D Profit understated and current assets overstated by $1200

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. Capital expenditure of $10 000 was wrongly treated as revenue expenditure and depreciation should have been 10% per annum. What was the effect on profit for the year?

A Profit understated by $9000
B Profit understated by $10 000
C Profit overstated by $9000
D Profit overstated by $10 000

42. Revenue expenditure of $5000 was wrongly treated as capital expenditure and depreciation was charged at 20% per annum. What was the effect on profit for the year?

A Profit overstated by $4000
B Profit overstated by $5000
C Profit understated by $4000
D Profit understated by $1000

43. A business paid $2000 for repairs but capitalised it and charged depreciation of 25%. What was the effect on non-current assets at the year-end?

A Non-current assets overstated by $1500
B Non-current assets overstated by $2000
C Non-current assets understated by $1500
D Non-current assets understated by $500

44. A business bought equipment for $6000 but recorded it as repairs. Depreciation should have been 10%. What was the effect on non-current assets at the year-end?

A Non-current assets overstated by $5400
B Non-current assets understated by $5400
C Non-current assets understated by $6000
D Non-current assets overstated by $600

45. Which transaction is most likely to increase both future earning capacity and non-current assets?

A Routine servicing of a machine
B Repairing a broken window with identical glass
C Installing a more powerful motor in existing machinery
D Paying electricity for the factory

46. Which transaction is most likely to maintain existing earning capacity only?

A Extending business premises
B Buying a new computer for office use
C Replacing a damaged part with an identical part
D Installing a security system for the first time

47. Which receipt should not be included in profit from ordinary trading?

A Cash sales
B Rent received
C Commission received
D Loan from bank

48. Which receipt would normally be treated as capital, not revenue?

A Sale of inventory
B Sale of old equipment
C Discount received from supplier
D Interest received on bank deposit

49. Which statement is correct about capital expenditure?

A It is always shown as an expense immediately.
B It increases or improves non-current assets.
C It is always paid by cheque.
D It is deducted from sales to calculate gross profit.

50. Which statement is correct about revenue expenditure?

A It is expenditure on buying or improving non-current assets.
B It is expenditure incurred for day-to-day running of the business.
C It is shown as a non-current asset in the statement of financial position.
D It is never included in the income statement.

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. B
   Capital expenditure = machine + delivery + installation
   = 40 000 + 1200 + 1800 = $43 000.
   Maintenance and insurance are revenue expenditure.

2. B
   Replacing a broken part only restores the machine. No improvement, no extra useful life, so revenue expenditure.

3. B
   The modification improves output and extends useful life, so it is capital expenditure.

4. A
   Repairs should be an expense. If capitalised, expenses are understated, profit is overstated and non-current assets are overstated.

5. B
   Capital expenditure should be an asset. If treated as an expense, profit is understated and assets are understated.

6. B
   Repainting without increasing value or useful life is revenue expenditure.

7. A
   Only the purchase price of the van is capitalised. Road tax and insurance are revenue expenses.

8. B
   Installation cost is necessary to bring machinery into use, so it is capital expenditure.

9. C
   Replacing a worn tyre maintains the van. It does not improve the asset, so it is revenue expenditure.

10. C
    Sale of an old motor vehicle is a capital receipt because it comes from disposal of a 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.

11. D
    Cash received from sale of goods is a revenue receipt because it comes from normal trading.

12. C
    Capitalised cost = purchase price + legal fees + stamp duty + repairs needed before use
    = 150 000 + 6000 + 4000 + 3000 = $163 000.

13. B
    Routine repairs after the premises are already in use are revenue expenditure.

14. C
    Capitalised cost = machine + delivery + installation
    = 25 000 + 900 + 1600 = $27 500.
    Training is revenue expenditure.

15. B
    Replacing the engine increases useful life and resale value, so it is capital expenditure.

16. B
    Ordinary servicing maintains the asset. It is revenue expenditure.

17. B
    Revenue expenditure gives benefit mainly to the current accounting period.

18. B
    Revenue receipts arise from normal business income and increase profit.

19. D
    Recording sale proceeds of an old machine as sales wrongly increases gross profit by $4000. Net profit is unchanged if the disposal profit is still correctly recognised overall.

20. A
    Proceeds from selling an old van are a capital receipt. Recording them as sales treats capital receipt as revenue receipt.

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
    Extending the shop is capital expenditure. If debited to repairs, expenses are overstated, so profit is understated and non-current assets are understated.

22. A
    Roof repairs are revenue expenditure. If debited to premises, profit is overstated and non-current assets are overstated.

23. A
    Delivery cost needed to bring an asset to the business is added to the asset’s cost.

24. C
    Annual maintenance is revenue expenditure, not part of the asset cost.

25. C
    Machine cost after trade discount = 50 000 − 10% = 45 000.
    Capital expenditure = 45 000 + 1500 + 2500 = $49 000.

26. B
    Security windows improve the building’s value and safety, so they are capital expenditure.

27. A
    Replacing broken windows with similar windows is repair/maintenance, so revenue expenditure.

28. C
    The owner taking a business computer for private use is drawings of a non-current asset.

29. B
    Advertising is revenue expenditure. Since it relates to next year, it may need a prepayment adjustment.

30. B
    Insurance compensation for destroyed inventory replaces trading goods, so it is a revenue receipt.

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
    Compensation for a destroyed machine replaces a non-current asset, so it is a capital receipt.

32. A
    Goods used to build display shelves become a non-current asset.
    Debit fixtures, credit purchases.

33. A
    Goods used as free samples are advertising expense.
    Debit advertising, credit purchases.

34. B
    Goods used for the owner’s private house are drawings.
    Debit drawings, credit purchases.

35. A
    Carriage inwards should reduce gross profit. If treated as carriage outwards, gross profit is overstated but net profit is unchanged.

36. A
    Carriage outwards should be an expense after gross profit. If treated as carriage inwards, gross profit is understated but net profit is unchanged.

37. A
    Delivery on purchases is carriage inwards. Treating it as carriage outwards overstates gross profit, but net profit remains unchanged.

38. B
    Delivery to customers is carriage outwards. Treating it as carriage inwards understates gross profit, but net profit remains unchanged.

39. B
    Office furniture is capital expenditure. If treated as office expense, profit and non-current assets are understated.

40. A
    Office cleaning is revenue expenditure. If capitalised as equipment, profit and non-current assets are overstated.

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
    Correct expense should be depreciation: 10% × 10 000 = $1000.
    Wrong expense recorded = $10 000.
    Profit understated by $9000.

42. A
    Correct expense should be $5000.
    Wrong expense recorded = depreciation only: 20% × 5000 = $1000.
    Profit overstated by $4000.

43. A
    Repairs of $2000 were wrongly capitalised. Depreciation charged = 25% × 2000 = $500.
    Carrying asset wrongly left = 2000 − 500 = $1500.
    Non-current assets overstated by $1500.

44. B
    Equipment should be capitalised at $6000 and depreciated by 10% = $600.
    Correct carrying amount = 6000 − 600 = $5400.
    Non-current assets understated by $5400.

45. C
    Installing a more powerful motor improves the machinery and future earning capacity.

46. C
    Replacing a damaged part with an identical part only maintains existing earning capacity.

47. D
    A bank loan is not ordinary trading income. It creates a liability.

48. B
    Sale of old equipment is a capital receipt.

49. B
    Capital expenditure buys, increases or improves non-current assets.

50. B
    Revenue expenditure is day-to-day running cost and is normally charged to the income statement.

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.