Capital and revenue expenditure and receipts: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
What is the effect of treating an item of capital expenditure as revenue expenditure?
1 Cost of non-current assets is overstated.
2 Cost of non-current assets is understated.
3 Depreciation for the year is overstated.
4 Depreciation for the year is understated.
Answer: D.
If capital expenditure is treated as revenue, the cost is written off to the income statement instead of being recorded as an asset, so the non-current assets never appear and their cost is UNDERSTATED, which is statement 2. Because there is no asset in the books, there is nothing to depreciate, so the depreciation charge is understated as well, which is statement 4. D is correct. Statements 1 and 3 describe the opposite error, treating revenue expenditure as capital, which inflates the asset and then charges depreciation on something that should have been an expense.
Question 2
The following payments were made when a new machine was purchased. $ cost of the machine 32 000
charge for delivering the machine 1 800
insurance of the machine 2 000
wages of employees installing the machine 1 300
How much was the capital expenditure?
Answer: C.
Capital expenditure covers everything needed to get the asset into its intended location and working condition. That is the machine at 32 000, the delivery of 1800 and the installation wages of 1300, giving 35 100, so C is correct. Insurance of 2000 is the odd one out: it protects the machine while it is used rather than bringing it into use, so it recurs every year and is revenue expenditure. D of 37 100 capitalises it anyway, which would overstate both the asset and the profit. A takes the machine alone, and B forgets the delivery.
Question 3
Which statements about capital expenditure are correct?
1 It is money spent on day-to-day business operations.
2 It is money spent on purchasing non-current assets.
3 It is recorded in the statement of financial position.
4 It includes expenses relating to non-current assets.
Answer: C.
Capital expenditure is money spent acquiring or improving non-current assets, which is statement 2, and because the spending creates an asset rather than a cost it appears in the statement of financial position, which is statement 3. C is correct. Statement 1 describes revenue expenditure, the day to day running costs charged in the income statement. Statement 4 is the near miss: expenses RELATING to a non-current asset, such as fuel, insurance or repairs, are revenue expenditure, because they keep the asset running rather than adding to what it is worth.
Question 4
A farmer sold a piece of land at market value.
How should the proceeds of this sale be treated?
Answer: A.
Land is a non-current asset, held to be used rather than sold in the ordinary course of trade, so money from selling it is a CAPITAL receipt and A is correct. B would be right only if the farmer were in the business of dealing in land, in which case the sale would be trading revenue in the income statement. C and D are not receipts at all: expenditure is money going out, and the question describes money coming in, so both misread the direction before the classification is even reached.
Question 5
A trader has purchased new business premises.
What are examples of capital expenditure?
1 cost of heating and lighting the new premises
2 cost of purchasing the new premises
3 legal costs of purchasing the new premises
4 office furniture purchased for use in the new premises
Answer: C.
Capital expenditure is what buys a non-current asset or brings it into use. The purchase price of the premises is item 2, the legal costs of buying them are item 3 because they are part of acquiring the asset, and the office furniture in item 4 is itself a non-current asset. C is correct. Item 1, heating and lighting, is revenue expenditure: it is consumed as the premises are used and recurs every year, so it belongs in the income statement. A, B and D each either include item 1 or drop one of the three genuine capital items.
What this practice covers
These questions are drawn from past CIE 0452 Accounting papers and filtered to capital and revenue expenditure and receipts. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on capital and revenue expenditure and receipts, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Capitalising insurance, licence, fuel or training on a new asset.
- Treating the proceeds of an asset sale as sales revenue.
- Saying the trial balance would reveal the error.
- Giving the effect on profit and forgetting the effect on assets.
- Treating a loan received as income.
- Forgetting that overstating an asset also overstates future depreciation.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Capital and revenue expenditure and receipts revision notes.