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    Question

    Which of the below mentioned statement is

    correct?
    A The nature of business is not an important criteria in separating an expenditure between capital and revenue. Correct Answer Incorrect Answer
    B Expenditure incurred for major repair of the asset so as to increase its productive capacity is Revenue in nature. Correct Answer Incorrect Answer
    C Amount spent as lawyer's fee to defend a suit claiming that the firm's factory site belonged to the plaintiff's land is Capital Expenditure. Correct Answer Incorrect Answer
    D Amount spent for replacement of worn-out part of machine is Capital Expenditure. Correct Answer Incorrect Answer
    E Amount spent for the construction of temporary huts, which were necessary for construction of the cinema house and were demolished when the cinema house was ready, is Capital Expenditure. Correct Answer Incorrect Answer

    Solution

    a. False: The nature of business is a very important criteria in separating an expenditure between capital and revenue. For example- For a trader dealing in furniture, purchase of furniture is revenue expenditure but for any other trade, the purchase of furniture should be treated as capital expenditure and shown in the balance sheet as asset.. b. False: Expenditure incurred for major repair of the asset so as to increase its productive capacity is capital in nature. c. False: Legal expenses incurred to defend a suit claiming that the firm's factory site belongs to the plaintiff is maintenance expenditure of the asset. By this expense, neither any endurable benefit can be obtained in future in addition to that what is presently available nor the capacity of the asset will be increased. Maintenance expenditure in relation to an asset is revenue expenditure. d. False: Amount spent for replacement of any worn-out part of a machine is revenue expense since it is part of its maintenance cost. e. True: Since temporary huts were necessary for the construction, their cost should be added to the cost of the cinema hall and thus capitalized.

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