- 20 Marks
Question
a) Distinguish between Capital Expenditure and Revenue Expenditure. (5 marks)
(b) The following Trial Balance was extracted from the books of Danfo Enterprise, a second-hand bags dealer, as at 31st December 2014:
| Description | DR (GH¢) | CR (GH¢) |
|---|---|---|
| Stock in Trade | 120,000 | |
| Vehicle (Cost) | 150,000 | |
| Trade Receivables | 80,000 | |
| Accumulated Depreciation: Vehicle | 30,000 | |
| Accumulated Depreciation: Furniture & Fittings | 10,120 | |
| Trade Payables | 100,000 | |
| Drawings | 120,000 | |
| General Expenses | 65,000 | |
| Provision for Doubtful Debts | 2,500 | |
| Rate & Rent | 14,000 | |
| Insurance | 5,000 | |
| Bad Debt | 7,000 | |
| Discount Received | 25,150 | |
| Discount Allowed | 15,160 | |
| Bank Balance | 165,240 | |
| Wages & Salaries | 250,000 | |
| Sundry Expenses | 6,150 | |
| Vehicle Running Expenses | 15,650 | |
| Furniture & Fittings | 50,600 | |
| Repairs to the Shop | 6,500 | |
| Purchases | 650,120 | |
| Sales | 1,079,130 | |
| Capital | 473,520 | |
| Total | 1,720,420 | 1,720,420 |
Additional Information:
i. Provision for doubtful debts is to be reduced by 10%.
ii. Rate and Rent has been paid in advance by two (2) months. Note that Danfo Enterprise pays GH¢1,000 each month.
iii. Stock in trade as at 31st December, 2014 GH¢80,150.
iv. A bill of GH¢6,150 for vehicle running was outstanding as at 31st December, 2014.
v. The Enterprise provides depreciation as follows:
- Vehicle: 20% per annum on straight line basis.
- Furniture and Fittings: 20% per annum on straight line basis.
You are required to:
i. Prepare Income statement for the year ending 31st December 2014. (8 marks)
ii. Prepare Statement of Financial Position as at 31st December 2014. (7 marks)
Answer
(a) Capital Expenditure:
- Capital expenditure results in the acquisition of fixed assets or an improvement in their earning capacity.
- It is not charged as an expense in the income statement in one go; instead, a depreciation or amortization charge is usually made to write off the capital expenditure gradually over time.
- Capital expenditure on fixed assets is the recognition of a fixed asset (e.g., vehicles, land, and buildings) in the statement of financial position of the business.
Revenue Expenditure:
- Revenue expenditure is incurred for the purpose of trade/service of the business, including selling & distribution expenses, administration expenses, and finance charges.
- It is also for maintaining the existing earning capacity of fixed assets, such as repair expenses.
- It ensures the smooth running of the day-to-day activities of the company/business.
(b) i. Danfo Enterprise Income Statement for the year ended 31st December, 2014
ii. Danfo Enterprise Statement of Financial Position as at 31st December 2014
- Topic: Capital structure and finance costs
- Series: NOV 2015
- Uploader: Theophilus