- 14 Marks
Question
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)
Answer
| Expenditure | Capital (N’000) | Revenue (N’000) |
|---|---|---|
| Purchase price (480,000 – 8% Trade Discount) | 441,600 | |
| Early settlement discount | (5% on payable) | |
| 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 |
Total:
- Capital Expenditure: 529,600 N’000
- Revenue Expenditure: 37,000 N’000
Explanation:
Capital expenditure includes costs necessary to bring the asset to its location and working condition, while revenue expenditure covers the day-to-day running costs or corrective actions that do not enhance the asset’s long-term value.
- Tags: Capital Expenditure, Classification, IAS 16, PPE, Revenue Expenditure
- Level: Level 1
- Uploader: Dotse