Question Tag: Capital Expenditure

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  • 15 Marks

FM – Nov 2022 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze the Chairman's proposals to improve EPS and discuss methods to align stakeholder objectives.

The Chairman of Opeyemi plc, a company listed on the Alternative Investment Market, has circulated a memorandum to the company’s directors and senior managers which contains the following statements:

“Looking to the year ahead, there are a number of measures which I propose to increase the company’s earnings per share (EPS).

Payments to trade creditors should be made as late as possible, even if this means extending our credit beyond the terms allowed by our suppliers. The company currently runs a substantial overdraft, and this measure will cut the level of bank interest and charges.

Relatively high capital expenditure in recent years has resulted in substantial depreciation charges in the profit or loss account. All capital spending, including that on the Oloro II project – designed to reduce toxic emissions from the manufacturing plant – should be postponed except where such spending can be shown to be essential to current operations.

Staff pay should be frozen at this year’s level for the forthcoming year. The company’s sponsorship of the local charity events run by the Staff Social Club should also, regrettably, be ended.

By boosting profits and therefore EPS, these measures will help us to achieve the highest possible stock market capitalisation.”

Required:

a. Prepare a response to the Chairman’s proposals which examines the possible consequences of the proposals for the price of the company’s shares and for the company’s stakeholders. (9 Marks)

b. Discuss FOUR ways that encourage managers to achieve stakeholder objectives. (6 Marks)

(Total 15 Marks)

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  • 15 Marks

TAX – May 2015 – L2 – SC – Q5 – Companies Income Tax (CIT)

Schedule of capital expenditure allocation for Covenant Construction Limited with assessment basis and treatment of capital expenditure.

Covenant Construction Limited commenced business on 3 August 2011, making up accounts to 31 July annually. The schedule of assets acquired prior to commencement of the business is as shown below:

Description ₦
Tractors and Grader 7,500,000
Motor vehicles for field operations 13,500,000
Construction site (Factory building) 11,250,000
Furniture, Fixtures and Fittings 778,250

Covenant Construction Limited won another contract and additional assets were purchased as stated below:

Date of Purchase Description Number of Items Cost (₦)
Nov. 2011 Plant & Machinery 3 580,000
April 2012 Motor vehicle 1 1,375,000
Aug. 2012 Building 1 1,350,000
Jan. 2013 Generator 1 450,000
June 2013 Factory extension 1 575,000
Nov. 2013 Pick-up van 2 1,050,000

At the last Board meeting, the Directors argued on what benefits will accrue to Covenant Construction Limited on Capital Expenditure incurred before and after commencement of business.

They were also interested in knowing the years that will be affected and the impact it will have on the company’s Total Profit.

You have been invited by the Finance Director of the company who asked you to look into these matters. The Finance Director has asked you to specifically address the following:

Required:

a. Prepare the schedule of Capital Expenditure Allocation and identify the Qualifying Expenditure based on which Capital Allowances are claimable: i. Normal basis of assessment (5 Marks)
ii. Revised basis of assessment (based on taxpayer’s right of election) (5 Marks)

b. Explain the treatment of Capital Expenditure acquired by Covenant Construction Limited before it commenced business on 3 August 2011. (2 Marks)

c. State the relevant tax years and corresponding basis period covered by the data above. (3 Marks)

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  • 20 Marks

FA – Nov 2020 – L1 – SB – Q5 – Elements of Financial Statements

Classify expenditure as capital or revenue and state recognition in financial statements.

Given below are items of revenue and capital expenditure:

  1. A number of new cars recently cleared by a motor car dealing company.
  2. Two new motor boats acquired by a ferry service agency.
  3. Vacant houses owned by an estate developing company, for which negotiations are ongoing for sale to prospective landlords.
  4. New buildings acquired for the purpose of holding items of plant and machinery belonging to a detergent manufacturing company.
  5. Cost of acquiring a leasehold property for office use.
  6. Granites purchased by an engineering contractor for use at a construction site.
  7. Cost of rehabilitating a dilapidated housing unit owned by an estate developer.
  8. Pre-production testing cost.

Required:

a. Using the tabular format below, classify the above transactions into capital or revenue expenditure. (8 Marks)

S/N | Capital Expenditure | Revenue Expenditure

b. State whether each of the items above will be recognized in the statement of profit or loss or in the statement of financial position. (8 Marks)

c. In respect of the information in (a) above, outline the details of information of the capital expenditure that should be included in the property, plant, and equipment (PPE) register. (4 Marks)

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  • 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

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  • 1 Marks

FA – May 2013 – L1 – SA – Q12 – Accounting Concepts

This question tests the understanding of capital expenditure items.

Which of the following should be classified as capital expenditure?

A. The annual depreciation of leasehold premises
B. Computer repairs and maintenance cost
C. Solicitors’ fees in connection with the purchase of leasehold premises
D. The wages of the machine operators
E. The interest paid on a loan

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  • 1 Marks

FA – Nov 2015 – L1 – SA – Q13 – Elements of Financial Statements

This question identifies the best explanation of the term "Capital Expenditure."

Which of the following can best explain the term “Capital Expenditure”?
A. Expenditure relating to the issue of share capital
B. Expenditure on expensive assets
C. Expenditure relating to the acquisition or improvement of non-current assets
D. Expenditure on non-current assets including repairs and maintenance
E. Expenditure relating to entertainment of guests

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  • 1 Marks

BMF – May 2018 – L1 – SA – Q11 – Basics of Business Finance and Financial Markets

Distinguishing between revenue and capital expenditure.

Expenditure that does not create a long-term asset is called:
A. Capital expenditure
B. Investment expenditure
C. Revenue expenditure
D. Sundry expenditure
E. Capital budgeting expenditure

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  • 6 Marks

FA – Nov 2014 – L1 – SB – Q4a – Elements of Financial Statements

Classifying items as capital expenditure for the Statement of Financial Position.

State which of the following items should be classified as capital expenditure for the purpose of preparing the Statement of Financial Position:

i. The purchase of leasehold premises
ii. The annual depreciation of leasehold premises
iii. Solicitor’s fees in connection with the purchase of leasehold premises
iv. The costs of adding extra-storage capacity to a mainframe computer used by the business
v. Computer repairs and maintenance costs
vi. Profit on the sale of an office building
vii. Revenue from sales via credit cards
viii. The cost of new machinery procured
ix. Custom duty charged on machinery procured and imported into the country
x. The carriage costs of transporting new machinery from the supplier’s factory to the buyer’s premises
xi. The wages of the machine operators
xii. Cost of cleaning of the machine room
xiii. Cost of oil and other materials purchased for the repairs of machine

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  • 14 Marks

FA – Nov 2019 – L1 – SB – Q2c – Accounting for Property, Plant, and Equipment (PPE) in Accordance with IAS 16

Classify expenditure for plant into capital and revenue.

c. Ahmed Ventures Ltd acquired an item of plant from Judexco Machine Ltd to facilitate its operations.

The schedule of expenditure for the plant is given below:

Expenditure Item N’000 %
Purchase price 480,000 100%
Trade discount applicable to the purchase price 8%
Early settlement discount on the payable amount 5%
Freight charges 25,000
Pre-production testing cost 15,000
One-year maintenance contract 12,000
Staff cost in relation to the use of the machine 8,000
Electrical installation cost 19,000
Concrete reinforcement 9,000
Cost of correcting installation error 17,000
Dismantling and restoration cost 20,000
Staff training in the use of the plant 14,000

Required:
Using the format provided below, classify the above plant costs into capital and revenue expenditure respectively. (14 Marks)

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  • 6 Marks

FA – Nov 2019 – L1 – SB – Q2a & b – Accounting for Property, Plant, and Equipment (IAS 16)-

Explanation of IAS 16 requirements for initial recognition of Property, Plant, and Equipment (PPE).

a. Explain the requirements of IAS 16 on the initial recognition of Property, Plant, and Equipment (PPE).

(3 Marks)

b. After the acquisition of an item of PPE, an entity continues to incur subsequent expenditure on the item.

Required:
Explain briefly the requirements of IAS 16 in relation to subsequent expenditure and subsequent measurement. (3 Marks)

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  • 1 Marks

FA – May 2017 – L1 – SA – Q15 – Accounting for Property, Plant, and Equipment (IAS 16)

Adjusts profit for incorrect treatment of a capital expenditure as an expense.

An accounts officer recorded ₦90,000, being the purchase price of a new machine, as repairs and maintenance costs. A draft profit of ₦450,000 for the period was calculated before the discovery of the error. The depreciation rate for machinery is 25% on cost with a full year’s charge in the year of purchase. What is the correct profit?
A. N360,000
B. N382,500
C. N427,500
D. N472,500
E. N517,500

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  • 20 Marks

FA – May 2016 – L1 – SB – Q6 – Elements of Financial Statements

Classify various expenditures as revenue or capital and their impact on financial statements and non-current asset register.

Given below are items of “Revenue” and “Capital” expenditure:

(i) A number of new cars that had recently been cleared by a motor car dealing company.

(ii) Two new motor boats acquired by a ferry service agency.

(iii) Vacant houses owned by an estate developing company in respect of which negotiations are ongoing for assistance for their sale to prospective landlords.

(iv) New buildings acquired for the purpose of holding the items of plant and machinery belonging to a detergent manufacturing company.

(v) Cost of acquiring a leasehold property for office use.

(vi) Granites purchased by an engineering contractor for use at a construction site.

(vii) Cost of rehabilitating a dilapidated housing unit owned by an estate developer.

(viii) Repairs to plant and machinery in a manufacturing company.

Required:

a. For each of the above, state whether it is a “Revenue” or “Capital” expenditure. (4 Marks)

b. State how each will be recognised in the statement of profit or loss and the statement of financial position as the case may be. (12 Marks)

c. State how the non-current assets register will be affected by any of the transactions. (4 Marks)

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  • 1 Marks

FA – May 2016 – L1 – SA – Q18 – Accounting for Property, Plant, and Equipment (IAS 16)

Determining which item qualifies as capital expenditure.

Which of the following is a capital expenditure?
A. Purchase of inventories
B. Purchase of motor vehicle for sale
C. Subscription paid
D. Extension of building
E. Repair of generator

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  • 1 Marks

FA – Mar/July 2020 – L1 – SA – Q4 – Accounting for Property, Plant, and Equipment (PPE) in Accordance with IAS

Identifying an example of capital expenditure

Which of the following payments is an example of capital expenditure?
A. Refurbishment as part of upgrading a building
B. Carriage outwards in respect of goods sold
C. Legal fees incurred to recover customer debts
D. Bonuses to production operatives
E. Maintenance cost of building

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  • 5 Marks

PT – Mar 2024 – L2 – Q4b – Income Tax Liabilities

State the differences between capital expenditure and revenue expenditure with relevant examples.

With relevant examples, state the differences between capital expenditure and revenue expenditure. (5 marks)

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  • 3 Marks

CR – May 2019 – L3 – Q2c – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40)

This question requires an explanation of the accounting treatment of government grants relating to capital expenditure under IAS 20.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance sets out the requirements for recognizing as income any grants received from government agencies, together with any repayments of such grants.

Required:
Detail the requirements of IAS 20 with respect to government grants to aid capital expenditure. (3 marks)

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  • 10 Marks

AT – Nov 2023 – L3 – Q5c – Tax planning

Explain the residual deduction rule and state four conditions under which repairs and improvements are considered allowable deductions.

Repairs and improvements are not mutually exclusive in tax administration because one leads to the other, and one cannot happen without the other. The Commissioner-General ensures that certain conditions are met before an amount of repairs and improvements is taken as an allowable deduction under the deductibility principles in tax administration.

You are the Tax Manager for Akwaaba and Associates, a firm of tax consultants. The Finance Manager of APC Ltd, a client of your firm, is contemplating how to treat major repair works being undertaken on their warehouse.

Required:
Write a memo to the Finance Manager of APC Ltd explaining what constitutes the residual deduction rule and state FOUR (4) conditions under which repairs and improvements are considered allowable deductions. (10 marks)

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  • 4 Marks

PSAF – May 2019 – L2 – Q2b -Public sector fiscal planning and budgeting

Outline the procedures for payment of works procured by an MDA.

b) Funds are released from the consolidated fund to the Ministries, Departments, and Agencies (MDAs) for use only when an appropriation bill has been passed into an appropriation act. However, when the Appropriation Act is issued, there are certain procedures usually followed in making payments for Capital Expenditure.

Required:
Outline the procedures for payment of works procured by an MDA.
(4 marks)

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  • 6 Marks

PSAF – May 2019 – L2 – Q2a – Public Procurement

Analyze internal control measures for public assets, outline payment procedures for capital expenditure, explain procurement offenses, and suggest ways to improve IGF in local governments.

a) The backward development in the public sector has been attributed to weaknesses in the Internal Control Systems in the public sector. Proper systems for the effective control over the custody and management of assets in public institutions are critical for Public Sector Accounting.

Required:
Analyze FOUR (4) key control measures required to be put in place to ensure effective management of Public Assets.
(6 marks)

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  • 20 Marks

FA – Mar 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Distinguishes between capital and revenue expenditure and calculates financial ratios to assess the performance of a business.

a) Distinguish between capital expenditure and revenue expenditure. (5 marks)

b) Banky is the owner of a business supplying goods to other traders. He has just received the financial statement for his business for the year ended 31 December 2022 from his accountant. Below are the summarized financial statements:

Required:

i) Calculate for Banky each of the following ratios for the year ended 31 December 2022 (where appropriate, calculations should be approximated to two decimal places):

  • Net profit margin. (2 marks)
  • Return on capital employed (using the closing year-end value for capital employed) (2 marks)
  • Current ratio. (2 marks)
  • Liquid (acid test) ratio. (2 marks)
  • Rate of inventory turnover. (2 marks)

ii) Based on the ratios calculated in i) above, and all other information provided, assess the performance (profitability) of Banky’s business. (5 marks)

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