Which one of the following is capital expenditure?
(1)cost of annual advertisement
(2)purchase of a delivery van
(3)purchase of raw material
(4)purchase of machine oil
Answers
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##ANSWER##
An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. Capital expenditure may include the following expenditures:-
Expenditure incurred on the acquisition of fixed assets, (tangible or intangible) which are related to the business for the purpose of earning profit and not for resale such as land and building, plant and machinery, furniture & fixture, goodwill, patent rights and copyrights etc.
The cost of fixed assets would include all expenditures necessary up to the time the asset is ready for use, for instance, cost of all building purchased would include the price paid to the seller, legal charges and broker’s commission. Similarly, the cost of machinery would include the purchase price, freight, import duty, cartage, octroi duty, erection and installation charges.
Expenditure which results in an increase in the earning capacity of a business. For instance, expenditure incurred in removing the business to a certain locality or better Situation premises and money paid for goodwill (the right to use the established name of outgoing firm) since it will attract the old firm’s customers and thus resulting in higher sales and profits.
Money spent on the improvement of existing assets so as to increase their life or reduce the cost of production, for example, conversion of hand driven machine to power-driven machine.
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Answer:
(4)purchase of machine oil.
Explanation:
it is the wages paid for building construction.