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

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

Question

Given below are items of revenue and capital expenditure:

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

Answer

a. Classification of expenditure as capital and revenue expenditure

S/N	Capital Expenditure	Revenue Expenditure
i.		A number of new cars cleared by a motor car dealer
ii.	Two new motor boats acquired by a ferry service agency
iii.		Vacant houses owned by an estate developer
iv.	New buildings acquired for plant and machinery
v.	Leasehold property for office use
vi.		Granites purchased for a construction site
vii.	Rehabilitating a dilapidated housing unit
viii.	Pre-production testing cost

b. Recognition of expenditure in financial statements

S/N	Recognition in the statement of profit or loss	Recognition in the statement of financial position
i.	Treated as purchase cost used in determining cost of sales	Recognized as inventory and shown under current assets
ii.	Depreciation as part of operating expenses	Recognized as part of PPE at its carrying value
iii.	Treated as inventory and used to determine cost of sales	Treated as inventory and shown under current assets
iv.	Depreciation as part of operating expenses	Recognized as part of PPE at its carrying value
v.	Amortization as part of operating expenses	Recognized as part of PPE at its carrying value
vi.	Treated as part of inventories for cost of sales	Unused portion shown as inventory under current assets
vii.	Treated as part of inventories	Treated as inventory under current assets
viii.	Treated as amortization in operating expenses	Recognized as part of PPE at carrying value

c. Information required in the property, plant, and equipment (PPE) register:

Name and class of the PPE.
Cost or revalued amount of the asset.
Acquisition date.
Estimated useful life.
Depreciation rate and method.
Residual value, if any.
Maintenance costs and repairs incurred.
Date of disposal and proceeds, if applicable.

Tags: Capital Expenditure, Depreciation, Financial Statements, Leasehold Property, PPE, Revenue Expenditure
Level: Level 1

Topic: Elements of Financial Statements
Series: NOV 2020

Uploader: Dotse