Which is capital expenditure?
- AOption (a)
Rs. 5,000 spent to remove a worn- out part. This part needs to be replaced with a new engine.
- BOption (b)
Expenses on foreign tour for purchasing a new machine
- COption (c)
Freight and insurance of the machinery purchased
- DOption (d)
Amount spent on repairing a secondhand machine before put to use
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Correct answer
Rs. 5,000 spent to remove a worn- out part. This part needs to be replaced with a new engine.
Why this answer is correct
The correct answer is - Option 1: Rs. 5,000 spent to remove a worn-out part. This part needs to be replaced with a new engine.
Key Points
- Capital expenditure
- Capital expenditure refers to expenses incurred for acquiring, upgrading, or extending the useful life of a fixed asset.
- Rs. 5,000 spent on removing a worn-out part and replacing it with a new engine qualifies as capital expenditure since it improves the functionality and extends the life of the asset.
- Such expenditures are recorded in the balance sheet and contribute to the long-term value of the asset.
- Why Option 1 is correct?
- The removal and replacement of the worn-out part is essential for the machine's continued operation and constitutes an investment in the asset.
- Unlike repair or maintenance costs, this expense results in a significant enhancement of the machine's capacity, making it a capital expenditure.
Additional Information
- Other options explained
- Option 2: Expenses on a foreign tour for purchasing a new machine are usually considered capital expenditure, as they are incurred to acquire a fixed asset. However, this option is not relevant to the question.
- Option 3: Freight and insurance costs for machinery purchased are part of the capital cost of acquiring the asset but do not directly pertain to replacement or repair.
- Option 4: Amount spent on repairing a secondhand machine before putting it to use qualifies as capital expenditure, but it is not relevant to the replacement of a worn-out part.
- Types of expenditures
- Capital expenditure: Adds value to the asset, extends its life, or improves its functionality. Recorded in the balance sheet.
- Revenue expenditure: Covers routine maintenance and repairs. Recorded in the income statement.
- Understanding the distinction is critical for accurate financial reporting and exam preparation.