Page 444 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chaptter 25

Chaapter 110

Exxampple 1

Whhich one oof the folloowing shouuld be acccounted foor as capittal
exppenditure??
A The cost of paintinng a buildinng

B Maintenance of a machine wwhich keepps productioon at the ssame level
C The purcchase of aa car by a ggarage for resale

D Legal fees incurredd on the puurchase off a buildingg
Sollution

Thee answer iss D becausse the legaal fees are part of thee initial cosst of the assset,
i.e. directly atttributable ccosts to brring the assset to the location annd condition
neccessary forr it to be caapable of ooperating foor its intended use.

A aand B are eexamples oof revenue expensess, i.e. running costs aand must be
chaarged to thee statemennt of profit or loss as an expensse.

C wwould normmally be ann example oof an asseet to capitalise, howevver, as thee
bussiness is a garage annd the car iis being boought for reesale, it muust be treaated
as aa purchasee expense (inventoryy) and not aa non-current asset.

Thee car is nott a resourcce for runniing the bussiness but an item puurchased wwith
the intention tto sell.

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