Accounting Q&A · Financial Accounting · Topic 6
A shop pays to install a new machine and to service an old one. Which cost belongs on the balance sheet, and which goes into this period’s expenses?
25 short-answer questions. Work out each answer before opening it. Amounts are in currency units.
Classification at a glance
| Transaction | Typical accounting treatment |
|---|---|
| Buy qualifying equipment | Recognise an asset at eligible cost. |
| Service equipment routinely | Recognise an expense as incurred. |
| Receive loan proceeds | Increase cash and liabilities. |
| Collect a credit sale | Increase cash and reduce receivables. |
Expenditure and receipts
1. What is capital expenditure?
Spending recognised as part of an asset’s cost because it meets the relevant recognition rules. Buying and installing a qualifying machine is an example.
2. What is revenue expenditure?
A traditional term for operating spending. The portion consumed this period is generally an expense. Amounts paid for future services can remain prepaid until used.
3. Why does the size of a payment give little guidance on its classification?
A large annual repair can be an expense, while a smaller qualifying replacement can be capitalised. Check what the payment buys and apply the relevant recognition and materiality rules.
4. Is every payment that benefits future periods capital expenditure?
Future benefit is only one consideration. The item must also meet the relevant asset recognition criteria. Expected benefits from advertising alone generally do not justify capitalisation.
5. What is a revenue receipt?
In introductory accounting, it generally means cash received from ordinary activities, such as customers paying for goods or services.
6. Is a customer receipt always revenue in the same period?
A collection may settle a receivable from an earlier sale. An advance may create a liability until the business delivers the promised goods or services.
7. What are examples of capital receipts in introductory accounting?
Owner contributions, loan proceeds and cash from selling a long-term asset. Their accounting effects differ, so classify them individually.
8. Does a loan increase profit when received?
Debit Cash and credit Loan Payable. The borrowing increases cash and liabilities without generating income.
9. How is an owner’s contribution recorded?
Debit Cash and credit Owner’s Capital in a sole trader’s books. It increases equity directly.
Capitalisation and depreciation
10. How is routine machine servicing treated?
Recognise routine servicing as an expense as incurred. It keeps the machine in working condition.
11. When can a replacement component be capitalised?
Capitalise the new component if it meets the relevant recognition criteria. Derecognise the carrying amount of the replaced part where applicable.
12. A machine costs 20,000, delivery costs 700 and installation costs 1,300. What is its initial cost?
22,000, assuming delivery and installation are directly attributable to getting it ready for its intended use.
13. Does staff training become part of a machine’s cost?
Training costs are generally expensed as incurred. They relate to preparing employees to operate the machine.
14. What if the business pays 600 for routine servicing at the same time it buys a machine?
If the 600 is routine maintenance for equipment already available for use, debit Repairs Expense and credit Cash or Payables. Classify the qualifying machine purchase separately.
15. How do you record a qualifying 22,000 machine purchased on credit?
Debit Machinery 22,000 and credit Accounts Payable 22,000. The credit records the amount owed to the supplier.
16. How much annual straight-line depreciation applies to the 22,000 machine?
With a 2,000 residual value and a five-year useful life, annual depreciation is 4,000 for a full year. Calculate (22,000 − 2,000) ÷ 5.
17. When does depreciation usually begin under IAS 16?
When the asset is available for use in the location and condition needed for its intended operation.
18. What happens when a machine with a 12,000 carrying amount sells for 15,000?
Assuming no selling costs, recognise a 3,000 disposal gain and remove the machine from the accounts. The 15,000 is cash proceeds.
Cash flow and exam checks
19. Where do cash payments for equipment usually appear in the cash flow statement?
As investing cash outflows. An unpaid purchase has no cash flow at the purchase date.
20. Where does cash received from a bank loan normally appear?
As a financing cash inflow because it changes the entity’s borrowings.
21. Is prepaid insurance an expense on the payment date?
The part covering future periods is a prepaid asset. Recognise insurance expense as coverage is consumed.
22. What does the textbook term deferred revenue expenditure mean?
Some textbooks use it for spending whose benefits are expected to extend into later periods. Apply the relevant asset recognition rules before carrying any amount forward.
23. Is deferred revenue expenditure the same as deferred revenue?
Deferred revenue usually refers to a liability for goods or services still owed after a customer pays in advance. The textbook expenditure term refers to spending.
24. What happens if a routine repair is incorrectly capitalised?
Before any depreciation adjustment, assets and profit are overstated and repair expense is understated.
25. What should an exam answer explain when classifying a transaction?
State what was acquired or received, identify the account affected, and show the effect on assets, liabilities, equity or profit.