Chapter 7: Capital and Revenue Expenditure (JAIIB – Paper 3)
1. Which of the following is an example of capital expenditure?
A. Salaries paid to staff
B. Electricity bill
C. Purchase of new machinery
D. Routine repair of equipment
Capital expenditure creates an asset or increases earning capacity, e.g., purchase of machinery. Salaries and electricity are revenue expenditure.
2. Which of the following is revenue expenditure?
A. Repairs and maintenance
B. Purchase of building
C. Cost of acquiring land
D. Installation of plant
Revenue expenditure is incurred for day-to-day operations, such as repairs and maintenance, salaries, and utilities.
3. Expenditure incurred to reduce expenses or increase income in future years but not resulting in immediate asset creation is called:
A. Capital Expenditure
B. Revenue Expenditure
C. Contingent Expenditure
D. Deferred Revenue Expenditure
Deferred revenue expenditure is initially shown as an asset and amortized over years, e.g., heavy advertisement campaign costs.
4. Payment of legal charges for acquiring a new building is treated as:
A. Revenue Expenditure
B. Capital Expenditure
C. Deferred Revenue Expenditure
D. Contingent Expenditure
Expenses directly related to acquisition of assets (like legal charges for land/building) are added to the cost of the asset and treated as capital expenditure.
5. A company spends ₹10 lakh on advertisement for launching a new product, expected to benefit sales for the next 3 years. This is classified as:
A. Revenue Expenditure
B. Capital Expenditure
C. Deferred Revenue Expenditure
D. Contingent Liability
Such advertisement benefits multiple years, so it is treated as deferred revenue expenditure and amortized over the expected period of benefit.
6. Contingent expenditure is:
A. Possible expenditure depending on occurrence of a future uncertain event
B. Regular operational expenditure
C. Capital expenditure incurred in installments
D. Deferred revenue expenditure yet to be written off
Contingent expenditure depends on uncertain future events (e.g., damages payable if a lawsuit is lost) and is disclosed in notes, not recognized in accounts.
7. Which of the following best distinguishes capital expenditure from revenue expenditure?
A. Both create future benefit but only revenue expenditure is recurring
B. Both are non-recurring in nature
C. Both are shown in the Profit & Loss Account
D. Capital expenditure creates an asset or increases earning capacity, while revenue expenditure maintains day-to-day operations
Capital expenditure results in asset creation or long-term benefits. Revenue expenditure is incurred for routine business operations.
8. Which of the following will be treated as capital expenditure?
A. Rent of factory building
B. Cost of extension of factory building
C. Salary of supervisor
D. Routine repair of factory roof
Cost of extension increases capacity and future benefits, so it is capital expenditure. Rent, salaries, and repairs are revenue expenditure.
9. The expenditure on painting a new factory building before use is classified as:
A. Capital Expenditure
B. Revenue Expenditure
C. Deferred Revenue Expenditure
D. Contingent Expenditure
Initial painting is necessary to bring the building into usable condition, hence it forms part of capital expenditure.
10. Expenditure on painting an existing factory building every year is classified as:
A. Capital Expenditure
B. Deferred Revenue Expenditure
C. Revenue Expenditure
D. Contingent Liability
Regular painting is recurring and maintains the asset in working condition, hence revenue expenditure.
11. A company spends ₹5 lakh on overhauling a second-hand machine to make it usable. This is:
A. Revenue Expenditure
B. Deferred Revenue Expenditure
C. Contingent Expenditure
D. Capital Expenditure
Expenditure incurred to bring an asset into working condition before use is capital expenditure.
12. Payment of annual insurance premium for factory machinery is an example of:
A. Capital Expenditure
B. Revenue Expenditure
C. Deferred Revenue Expenditure
D. Capital Loss
Insurance is recurring and does not create an asset. It is revenue expenditure charged to Profit & Loss account.
13. Which of the following is an example of capital receipt?
A. Rent received
B. Commission received
C. Loan taken from a bank
D. Interest received on investments
Loan taken from a bank increases liability and is a capital receipt. Rent, commission, and interest are revenue receipts.
14. Which of the following is revenue receipt?
A. Sale proceeds of goods
B. Issue of shares
C. Loan raised
D. Sale of fixed asset
Revenue receipts are recurring in nature, such as sales, commission, or interest. Issue of shares, loan, and sale of fixed assets are capital receipts.
15. Government receives money from disinvestment of public sector units. This is classified as:
A. Revenue Receipt
B. Capital Receipt
C. Deferred Revenue Receipt
D. Contingent Receipt
Proceeds from disinvestment reduce ownership of government in assets, hence treated as capital receipts.
16. Which of the following correctly distinguishes capital receipts from revenue receipts?
A. Both are recurring in nature
B. Capital receipts appear in Profit & Loss account, revenue receipts in Balance Sheet
C. Capital receipts reduce liability, revenue receipts increase asset
D. Capital receipts are non-recurring and affect balance sheet, revenue receipts are recurring and shown in Profit & Loss account
Capital receipts are generally non-recurring and affect the financial position in the Balance Sheet. Revenue receipts are recurring and credited to Profit & Loss account.
17. Premium received on issue of shares by a company is:
A. Capital Receipt
B. Revenue Receipt
C. Deferred Revenue Receipt
D. Contingent Receipt
Share premium is a capital receipt and transferred to Securities Premium Reserve, not to Profit & Loss account.
18. Dividend received by a company on its investments in other companies is:
A. Capital Receipt
B. Contingent Receipt
C. Revenue Receipt
D. Deferred Revenue Receipt
Dividend is recurring in nature and represents income, hence treated as revenue receipt.
