Question 1

Which of the following best describes capital expenditure?

Accepted Answer

Spending that results in either the acquisition of non-current assets or an improvement in their earning capacity.

Question 2

A business purchases a new machine for £12,000, pays £800 for delivery, £1,200 for installation, and £500 for repairs after two months. What is the total amount to be debited to the machinery at cost account?

Accepted Answer

£13,200

Question 3

Which of the following expenditures should be classified as revenue expenditure?

Accepted Answer

Cost of repainting a building three years after purchase.

Question 4

A business buys a delivery van for £18,000. It also pays £600 for insurance, £200 for road tax, and £100 for petrol. What is the capital expenditure?

Accepted Answer

£18,000

Question 5

If a business incorrectly classifies revenue expenditure as capital expenditure, what is the impact on the financial statements?

Accepted Answer

Net profit will be overstated and non-current assets will be overstated.

Question 6

Which of the following is NOT a characteristic of a non-current asset?

Accepted Answer

It is bought for resale.

Question 7

A business spends £2,000 to add a new feature to a machine, and £700 to repair it. How should these expenditures be classified?

Accepted Answer

£2,000 capital expenditure; £700 revenue expenditure

Question 8

According to IAS 23, when can borrowing costs be capitalised as part of the cost of a non-current asset?

Accepted Answer

When the asset is self-constructed and takes a long time to get ready for use.

Question 9

A business constructs a new factory at a cost of £2,000,000. It borrows £1,600,000 at 5% annual interest for 9 months during construction. What is the total cost to be recorded for the factory in the balance sheet?

Accepted Answer

£2,000,000 + £60,000 = £2,060,000

Question 10

Which of the following would be capitalised as part of the cost of a new building?

Accepted Answer

Architects’ fees for design

Question 11

A business spends £5,000 to prepare a site for a new warehouse, £250,000 to buy the warehouse, and £3,000 for repairs after storm damage. What is the total capital expenditure?

Accepted Answer

£258,000

Question 12

Which of the following statements about capitalising interest costs is correct?

Accepted Answer

Interest costs can be capitalised only if they are directly attributable to the construction of a non-current asset.

Question 13

Which of the following is an example of revenue expenditure?

Accepted Answer

Wages paid to employees for day-to-day operations

Question 14

A business buys a computer for £1,500, pays £100 for delivery, £200 for installation, and £50 for software updates after six months. What is the total capital expenditure?

Accepted Answer

£1,800

Question 15

If capital expenditure is mistakenly treated as revenue expenditure, what is the effect on net profit and non-current assets?

Accepted Answer

Net profit will be understated and non-current assets will be understated.

Question 16

Which of the following costs incurred in bringing a non-current asset into use for the first time should NOT be included in its capitalised cost?

Accepted Answer

Routine repairs after the asset is in use

Question 17

A business spends £1,000 to add extra headlights to a delivery van and £400 to repair the van. How should these expenditures be treated?

Accepted Answer

£1,000 capital expenditure; £400 revenue expenditure

Question 18

Which of the following best explains why the word 'capital' is used in both 'owner’s capital' and 'capital expenditure'?

Accepted Answer

Both represent major or important investments in the business.

Question 19

A business borrows £2,000,000 at 7% annual interest to construct a new office building. Construction takes 10 months. What is the amount of interest to be capitalised?

Accepted Answer

$$2,000,000 	imes 0.07 	imes \frac{10}{12} = £116,667$$

Question 20

Which of the following is a plausible argument against capitalising borrowing costs for self-constructed assets?

Accepted Answer

It may be difficult and costly to identify and calculate the borrowing costs to be capitalised.

Capital Expenditure and Revenue Expenditure: Classification and Impact in Financial Accounting

Study Guide - Practice Questions

Study Guide - Flashcards