Capital and Revenue Test 3

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Capital and Revenue Test 3

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Weekly Quiz Competition

Question 1
1 / -0

Which of the following is deferred revenue expenditure?

A
High legal expenses incurred by the company to defend legal suit of a 10,00,000.

B
Sales promotion expenses amounting to Rs.50000.

C
Rs. 10000 spent on dismantling of old Plant and Machinery.

D
All the three.

Solution

Deferred revenue expenditure is an expenditure which is revenue in nature and incurred during an accounting period but the benefits from this is to be arrived in coming years.
Therefore high legal expenses to defend a legal suit is a revenue expenses otherwise but its benefits will also arise in future too, hence this has to be treated as deferred revenue expenditure.
Question 2
1 / -0

Expenses the benefit of which does not last more than 12 months are treated as ______.

A
deferred revenue expense

B
revenue expense

C
capital expense

D
loss

Solution

If the benefit of expenditure is exhausted within a year, it is treated as an expense (also called as revenue expenditure). Following are few examples of revenue expenditure are:
1. Purchases
2. Wages
3. Freight inward & outward
4. Salary and wages
5. Selling and distribution expenditure
6. Depreciation
7. Interest on borrowings
8. Loss on sale of fixed assets
Question 3
1 / -0

_________is not a capital expenditure.

A
Rs.40000 spent on CNG fitting on the old car

B
Rs.10000 paid as excise duty on new capital equipment

C
Rs.15000 spent on construction of temporary structure for storing building material

D
Rs. 10000 paid for removal of old waste and scrap

Solution

Amount spent on normal business operations are treated as revenue expenditure. Removal of old waste and scrap is a normal routine business activity hence cost incurred on this should be treated as revenue cost not the capital cost.
Question 4
1 / -0

An amount of Rs.25000 spent on a lawyer's fees to defend a suit for infringement of patent rights is_________.

A
Capital Expenditure

B
Revenue Expenditure

C
Deferred Revenue Expenditure

D
None of the above

Solution

Any expense which is incurred to safeguard the interest of the business are treated as revenue expenditure.
Rs.25000 spent on lawyer's fees to defend the suit for infringement of patent rights is a revenue expenditure.
Question 5
1 / -0

Wrong classification of expenses into revenue and capital expenditure lead to_________.

A
under statement of profit or loss

B
over statement of profit or loss

C
distortion in current ratio

D
either (a) and (b)

Solution

Wrong classification of expenditure in to revenue and capital is an error of principal. In such case, trial balance may agreed but this will show under or over statement of profit.
For example, Rs. 5000 wages paid for installation of machine is a capital expenditure. If this is considered as revenue expenditure. This will result an understatement of profit.
Question 6
1 / -0

_________is a capital expenditure.

A
Cost of a standby equipment

B
Goods purchased for resale

C
Repair of a second hand equipment

D
Annual maintenance of computer systems

Solution

Expenditure can be segregated as revenue expenditure and capital expenditure.

Revenue expenditure are those which are incurred on day to day smooth operation of the business.

Capital expenditure are those which gives the benefit to the business for a longer duration. Normally value of assets and heavy expenditure on an overhaul of the machine are capital expenditure.

Hence cost of standby equipment is a capital expenditure.
Question 7
1 / -0

_______is a revenue expenditure.

A
Freight paid on purchase of Plant and Machinery

B
Legal expenses paid to acquire a property

C
Expenses incurred to reduce working capital requirement

D
Annual whitewash of the factory building

Solution

Normal wear and tear of building premises or plant & machinery are treated as routine repair & maintenance.
Annual white wash of factory building is also part of routine normal wear & tear, hence it is a revenue expenditure.
Question 8
1 / -0

___________is/are deferred revenue expenditure.

A
Preliminary expenses

B
Heavy advertisement expenses

C
Brokerage on issue of shares

D
All the three
Solution
Deferred revenue expenditure is an expenditure which is revenue in nature and incurred during an accounting period but the benefits from this is to be arrived in coming years.
Few examples of deferred revenue expenditure:
Preliminary Expenses
Heavy Advertisement expenses
Brokerage on issue of shares
Question 9
1 / -0

Choose the true statement.

A
A lump sum payment paid for purchase of raw materials is treated as capital expenditure.

B
Expenditure incurred on getting copyright is treated as capital expenditure.

C
Repair and maintenance irrespective of nature and amount is always treated as revenue expenditure.

D
Cost of stand by equipment is a revenue expenditure.

Solution

Capital expenditures include fixed assets or the expenditures which are incurred in current financial year but are to be spread over more than one financial year. All the expenditures which relate to acquisition of permanent assets and are intended to be used in the business for the purpose of earning revenue are called as capital expenditures. Normally, theses assets have a long life and never meant for resale. The term capital expenditure is used to signify the following:
1. Increase in quantity of fixed assets: It means the purchase of new assets will be treated as capital expenditure.
2. Replacement of fixed assets: When any expenditure is made on the replacement of old fixed assets with the new fixed assets then also these expenditures are called capital expenditure.
3. Wages and erection expenses on ercection of plant or machinery, cartage in respect of the erected machines will be treated as capital expenditure.
5. Expenditures incurred for acquiring the patent rights, copyrights, and goodwill are the capital expenditures.
Question 10
1 / -0

Which of these is not a temporary account ?

A
Insurance A/c

B
Building A/c

C
Repair and maintenance A/c

D
Preliminary A/c

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Capital and Revenue Test 3

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Capital and Revenue Test 3

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SHARING IS CARING

Question 1

High legal expenses incurred by the company to defend legal suit of a 10,00,000.

Sales promotion expenses amounting to Rs.50000.

Rs. 10000 spent on dismantling of old Plant and Machinery.

All the three.

Solution

Question 2

deferred revenue expense

revenue expense

capital expense

loss

Solution

Question 3

Rs.40000 spent on CNG fitting on the old car

Rs.10000 paid as excise duty on new capital equipment

Rs.15000 spent on construction of temporary structure for storing building material

Rs. 10000 paid for removal of old waste and scrap

Solution

Question 4

Capital Expenditure

Revenue Expenditure

Deferred Revenue Expenditure

None of the above

Solution

Question 5

under statement of profit or loss

over statement of profit or loss

distortion in current ratio

either (a) and (b)

Solution

Question 6

Cost of a standby equipment

Goods purchased for resale

Repair of a second hand equipment

Annual maintenance of computer systems

Solution

Question 7

Freight paid on purchase of Plant and Machinery

Legal expenses paid to acquire a property

Expenses incurred to reduce working capital requirement

Annual whitewash of the factory building

Solution

Question 8

Preliminary expenses

Heavy advertisement expenses

Brokerage on issue of shares

All the three

Solution

Question 9

A lump sum payment paid for purchase of raw materials is treated as capital expenditure.

Expenditure incurred on getting copyright is treated as capital expenditure.

Repair and maintenance irrespective of nature and amount is always treated as revenue expenditure.

Cost of stand by equipment is a revenue expenditure.

Solution

Question 10

Insurance A/c

Building A/c

Repair and maintenance A/c

Preliminary A/c

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