Skip to content
MarkSchemeMarkScheme
Sign up — no card

9706 · 1.3.1

Capital and revenue income and expenditure — practice questions

Practice and worked examples for 9706 Capital and revenue income and expenditure. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A business incurs the following costs related to a new piece of equipment: Machine list price $12,000; Delivery cost $2,000; One-year maintenance contract taken out at the time of purchase $1,000. How should these costs be treated in the financial statements?

Show solution outline

Step 1: Classify the main asset cost. The machine's list price of $12,000 is capital expenditure. It is the cost of acquiring a non-current asset.

Step 2: Classify costs to bring the asset into use. The delivery cost of $2,000 is necessary to get the machine to its working location. Therefore, it is also capital expenditure and must be added to the cost of the asset.

Step 3: Classify running costs. The one-year maintenance contract of $1,000 is an operational cost to keep the asset running. It is revenue expenditure and should be expensed to the Statement of Profit or Loss for the period.

Final Calculation:

  • Total Capitalised Cost (recorded on SOFP): $12,000 (machine) + $2,000 (delivery) = **14,000∗∗.14,000**.
  • Total Revenue Expense (recorded on SPL): **1,000∗∗.1,000**.
  • Depreciation will be calculated on the capitalised cost of 14,000.14,000.

Worked example 2

Delta Ltd spent $50,000 on a major upgrade to its production line on 1 January 2023, which extended its useful life. The accountant incorrectly treated the entire amount as a repairs expense. The business's policy is to depreciate machinery at 20% per annum on a straight-line basis, with a full year's depreciation in the year of acquisition. The draft profit for the year ended 31 December 2023 was $120,000. Calculate the correct profit for the year and state the impact on the Statement of Financial Position.

Show solution outline

Step 1: Identify the error and correct classification. The $50,000 upgrade is capital expenditure because it enhances the asset and extends its life. It was incorrectly treated as revenue expenditure (repairs).

Step 2: Calculate the effect of the error on expenses.

  • Incorrect expense recorded (Repairs): 50,00050,000
  • Correct expense to be recorded (Depreciation): 20% of 50,000=50,000 = 10,000
  • Overstatement of expenses: 50,000−50,000 - 10,000 = 40,00040,000

Step 3: Calculate the corrected profit. Since expenses were overstated by $40,000, the profit was understated by the same amount.

  • Draft Profit: 120,000120,000
  • Add back understatement: + 40,00040,000
  • **Corrected Profit for the year: 160,000∗∗160,000**

Alternative Calculation:

  • Draft Profit: 120,000120,000
  • Add back incorrect repairs expense: + 50,00050,000
  • Deduct correct depreciation expense: - 10,00010,000
  • **Corrected Profit: 160,000∗∗160,000**

Step 4: State the impact on the Statement of Financial Position (SOFP) at 31 December 2023.

  • Non-Current Assets: Understated. They should be increased by the Net Book Value of the new asset, which is Cost ($50,000) - Accumulated Depreciation ($10,000) = **40,000∗∗.40,000**.
  • Profit / Equity: Understated. As calculated above, profit is understated by $40,000. This means retained earnings (and thus total equity) are also understated by $40,000.
Mark a 9706 question on this topicFull lessonOpen in course studio