• 1 Marks

FA – Nov 2020 – L1 – SA – Q14 – Accounting for Property, Plant, and Equipment (IAS 16)

Identifies an item to be classified as capital expenditure.

Which of the following should be classified as capital expenditure?
A. Penalty paid to a supplier for late payment in respect of plant supplied
B. Interest payable on loan used exclusively for the production of self-constructed PPE
C. Staff training cost on the use of equipment
D. Legal fees on debt recovery
E. Bonuses to production operatives

B. Interest payable on loan used exclusively for the production of self-constructed PPE

Explanation:
Capital expenditure refers to costs incurred to acquire or improve a long-term asset. Interest payable on a loan specifically used for the construction of property, plant, and equipment (PPE) is considered part of the cost of that asset under IAS 23 (Borrowing Costs) and is capitalized. Other expenses like penalties, legal fees, or bonuses are considered operating costs and are classified as revenue expenditure.

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