CBSE Class 11 Accountancy Revision Worksheet Set 03

Question 1. Show how these items will appear in the final account: A machine costing Rs.200000 was purchased on 1st July 2004. Wages Rs.10000 for its erection have been debited to wages account. Provide depreciation on plant and machinery @ 10% p.a.
Answer: 1. Rectification of Error: Wages paid for the erection of a machine are capital expenditure and should be added to the cost of the machine. Since they were wrongly debited to the wages account, we must rectify this by adding Rs. 10,000 to the machinery cost.
Total Cost of Machinery = Rs. 2,00,000 + Rs. 10,000 = Rs. 2,10,000
2. Calculation of Depreciation for the year (assuming accounting year ends on 31st March):
Date of purchase = 1st July 2004
Period from 1st July 2004 to 31st March 2005 = 9 months
Depreciation = \(210000 \times \frac{10}{100} \times \frac{9}{12} = \text{Rs. } 15750\)
3. Presentation in Final Accounts:
(a) Balance Sheet (Asset side):
Machinery = Rs. 2,10,000
Less: Depreciation = \(\text{Rs. } 15,750\)
Net Machinery = \(\text{Rs. } 1,94,250\)
(b) Profit and Loss Account (Debit side):
Depreciation on machinery = Rs. 15,750
Wages in Trading/Profit and Loss Account will be reduced by Rs. 10,000 due to rectification.
In simple words: Erection wages are added to the machine cost, and depreciation is calculated for the period the machine was actually used during the year.
Exam Tip: Always add erection, installation, and carriage expenses of a fixed asset to its original cost before calculating depreciation.

Question 2. On January 1, 2000 machineries were purchased by X for Rs. 50000. on 1st july, 2001 additions were made to the extent of Rs. 10000. on April 1, 2002, further additions were made to the extent of Rs. 6400. on Rs. 6000 . Depreciation is charged at 10% p.a. on original cost. Show the machinery account for the years from 2000 to 2003 in the books of X.
Answer: The Machinery Account for the years 2000 to 2003 is prepared below under Straight Line Method (Original Cost Method):

In simple words: Depreciation is calculated every year on the original purchase price of each machinery block based on the months used.
Exam Tip: Under the original cost method, depreciation remains constant every full year for each specific asset block unless a new asset is added or sold.

Question 3. Classify the following into capital and revenue:
1. Rs. 1000 paid for removal of stock to another location for sale.
Answer: Revenue expenditure. It is an ordinary operating expense incurred for shifting trading stock.
In simple words: Routine operational expenses are revenue in nature.
Exam Tip: Expenses incurred for running day-to-day business operations are revenue expenditure.

2. Rs. 2000 spent on demolition of a building to construct a bigger building on the same site.
Answer: Capital expenditure. Cost of demolition incidental to the construction of a new asset is added to the cost of the new building.
In simple words: Money spent to prepare a site for a new building is part of the asset cost.
Exam Tip: Expenses to bring a new fixed asset into usable condition are always capitalized.

3. Rs. 1000 spent in defending a legal suit.
Answer: Revenue expenditure (unless it relates directly to defending the title of a fixed asset, but general legal suits for operations are revenue).
In simple words: Normal legal fees for business disputes are treated as revenue expenses.
Exam Tip: Legal expenses to protect business operations are revenue; legal expenses to acquire or defend ownership of fixed assets are capital.

4. Rs. 25000 spent in searching for a new product, but it did not result in any success.
Answer: Revenue expenditure (Deferred revenue expenditure or written off to Profit and Loss Account). Since no asset or intangible right was created, it cannot be capitalized.
In simple words: Failed research costs are business losses and treated as revenue expenses.
Exam Tip: Research and development expenses that fail to create a lasting asset are charged as revenue expenditure.

5. Rs. 2000 spent on painting a factory.
Answer: Revenue expenditure. Painting is a periodic maintenance and repair expense.
In simple words: Regular repairs and maintenance are revenue expenses.
Exam Tip: Repairs to maintain existing assets in working condition are revenue expenditure.

6. Legal expenses incurred in raising a debenture loan.
Answer: Capital expenditure (Fictitious asset / Deferred revenue expenditure). Expenses on raising long-term loans are capitalized and written off over the period of the loan.
In simple words: Expenses related to raising capital or loans are treated as capital/fictitious assets.
Exam Tip: Brokerage, commission, and legal expenses on issue of shares or debentures are capital expenditure.

7. Profit realized on the sale of investments
Answer: Capital receipt / Capital gain. Sale of non-current investments is a capital transaction.
In simple words: Profit from selling investments is a capital gain.
Exam Tip: Profits or losses on the sale of fixed assets or investments are capital in nature.

8. Labor welfare expenses
Answer: Revenue expenditure. Expenses incurred on employee welfare are routine operating expenses.
In simple words: Staff welfare costs are routine business expenses.
Exam Tip: All employee-related recurring benefits and welfare costs are revenue expenditures.

9. A sum of Rs. 10000 spent for alteration of existing plant incorporating thereby new devices which could effect substantial reduction in power consumption.
Answer: Capital expenditure. This is an improvement/enhancement expenditure that increases the earning capacity or efficiency of an existing fixed asset.
In simple words: Upgrades that improve machine efficiency are capitalized.
Exam Tip: Major alterations that reduce operating costs or increase output are capital expenditures.

10. Imported goods worth Rs. 25000 confiscated by Customs Authorities for non disclosure of material facts.
Answer: Revenue loss (Loss by confiscation, charged to Profit and Loss Account). It is an abnormal loss.
In simple words: Loss of goods due to legal confiscation is treated as an expense/loss.
Exam Tip: Confiscation of goods by authorities represents an abnormal loss and is debited to the Profit and Loss Account.

11. Compensation of Rs. 2.50 crores paid to workers, who opted for voluntary retirement.
Answer: Deferred revenue expenditure (or Revenue expenditure spread over a few years). VRS compensation gives a long-term benefit of reduced workforce cost.
In simple words: Heavy payouts for voluntary retirement benefit future years, so they are deferred.
Exam Tip: Voluntary Retirement Scheme (VRS) payments are heavy one-time expenses written off over multiple accounting periods.

12. New tyres for a delivery van
Answer: Revenue expenditure. Replacement of tyres of a vehicle is routine maintenance necessary for running the vehicle.
In simple words: Replacing worn-out parts like tyres is a routine repair expense.
Exam Tip: Replacement of minor parts of machinery or vehicles for maintenance is revenue expenditure.

13. Receipt of commission by a firm of brokers.
Answer: Revenue receipt. Commission earned in the ordinary course of business is operating revenue.
In simple words: Brokerage commission earned is routine business income.
Exam Tip: Regular earnings from business operations are revenue receipts.

14. The cost of re-painting the exterior of office premises
Answer: Revenue expenditure. Periodic painting and whitewashing are maintenance expenses.
In simple words: Repainting buildings periodically is a normal maintenance cost.
Exam Tip: Whitewashing and painting do not increase asset life permanently; they are revenue expenses.

15. Purchase of patent rights Rs. 5000 and renewal fees for the next year Rs. 250.
Answer: Patent rights purchase of Rs. 5,000 is Capital expenditure (intangible asset). Renewal fees of Rs. 250 for the next year is Revenue expenditure.
In simple words: Buying a patent is capital, but paying annual renewal fees is revenue.
Exam Tip: Acquisition cost of intellectual property is capital, while routine annual renewals or maintenance fees are revenue.

16. Repairs to furniture Rs. 500
Answer: Revenue expenditure. General repairs to keep furniture usable are revenue in nature.
In simple words: Fixing broken furniture is a routine repair expense.
Exam Tip: Minor repairs to maintain existing furniture are charged to the revenue account.