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If Rs.15,000 is spent on the repair of a secondhand machinery and Rs. 2,500 on freight in connection with its acquisition, what is the amount of capital expenditure ?

If Rs.15,000 is spent on the repair of a secondhand machinery and Rs. 2,500 on freight in connection with its acquisition, what is the amount of capital expenditure ? Correct Answer Rs.17,500

Capital Expenditures:

  • Capital expenditures refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity of the company.
  • Long-term assets are usually physical, fixed, and non-consumable assets such as property, equipment, or infrastructure, and that have a useful life of more than one accounting period.

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  1. When a second-hand asset is purchased, expenditure incurred to bring the asset into working order is treated as capital expenditure.
  2. In the given case, second-hand machinery is purchased and a sum of money is spent upon overhauling/repairing and acquiring it. The expenditure on acquisition and overhauling will be considered as capital expenditure.
  3. Similarly, if new machinery is purchased and installed, the expenditure up to the point the machinery is ready to work will be capital expenditure, but expenditure, after it is ready to work, will not be treated as capital.

Therefore, Total amount of Capital expenditure= Rs.15,000 (repair of a secondhand machinery) + Rs. 2,500 (freight charges)= Rs. 17,500.

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