Case Let - Capital Expenditure & Revenue Expenditure

Raja Ram Ltd., for which you are the Accounts Manager, has removed the works factory to a more suitable site. During the removal process the following stream of expenditure were incurred: (i) A sum of Rs.47,500 was spent on dismantling, removing and reinstalling plant, machinery and fixtures. (ii) The removal of stock from old works to new works cost Rs.5,000. (iii) Plant and machinery which stood in books at Rs.7,50,000 included a machine at a book value of Rs.15,000. This being obsolete was sold off for Rs.5,000 and was replaced by a new machine which costs Rs.24,000. (iv) The fixtures and furniture appeared in the books at Rs.75,000. Of these some portion of the book value of Rs.15,000 was discarded and sold off for Rs.16,000 and new furniture of the value of Rs.12,000 was acquired. (v) A sum of Rs.11,000 was spent on painting the new factory. Your accounts clerk has come to you seeking your help to classify the above expenditure as to capital expenditure and revenue expenditure. Advise him. Solution: (i) Rs.47,500 will have to be treated as revenue expenditure. It may be treated as deferred revenue expenditure item and spread over a term of years say four to five years. 95 (ii) The cost of removal of stock from the old works to the new works does not either add to the value of the profit earning capacity of the asset and as such it should be treated as an item of revenue expenditure. (iii) Rs.10,000 the difference between the book value of the machine sold and the amount realised on sale, will have to be charged off to revenue as depreciation. Rs.24,000, the cost of new machine, will have to be capitalised. (iv) Rs.1,000 the difference between the book value of the fixtures and fittings discarded and the amount realised there from will be treated as capital profit and therefore be credited to capital revenue account. Rs.12,000 the cost of new furniture, will be capitalised. (v) A sum of Rs.11,000 spent on painting a new factory is capital expenditure and will be added to the cost of factory building as it is all to the new factory.

Case Let Depreciation. Pondicherry Roadways Ltd which depreciates its machinery at 10% p.a. on written down value desires to change the basis to straight line method, the rate remaining the same. The decision is taken on 31st December 2005 to be effective from 1st January 2003. On 1st January 2005 the balance in the machinery account is Rs.29,16,000. On 1st July 2005 a part of machinery purchased on 1st January 2003 for Rs.2,40,000 was sold for Rs.1,35,000. On the same day a new machine is purchased for Rs.4,50,000 and installed at a cost of Rs.24,000. Analyse the above case and answer the following questions: (i) What was the loss incurred on the machine sold? (ii) What was the book value of unsold machinery on 1-1-2003. (iii) What would be the additional depreciation due to change in method? (iv) What should be the depreciation to be charged for 2005? Answers: (i) Rs.49,680 (ii) Rs.33,60,000 (iii) Rs.33,600 (iv) Rs.3,59,700

Case Let- Trial Balance

In an examination the total of trial balance was to be Rs. 24,76,000/-. One of the students was able to show the same total of trial balance and was satisfied with the solution he had given. But in fact it was not correct. There were many mistakes. If you are asked to locate the errors from the trial balance as given by that student (given below) and prepare the corrected trial balance with correct total also Rs. 24,76,000/-, how many errors are there? Why have they not affected the tallying of trial balance? Please explain the type of errors that permit the trial balance to agree. TRIAL BALANCE (AS PREPARED BY THE STUDENT) Name Of A/c Building Machinery Return outwards Bad debts Discount Received Cash Bank overdraft Creditors Purchases Dr 6,09,000 1,79,000 26,000 28,000 30,000 4,000 1,00,000 5,00,000 10,00,00 0 24,76,00 0 Name Of A/c Capital Fixtures Sales Debtors Interest Received 7,36,000 56,000 10,40,000 6,00,000 44,000 Cr

24,76,000