Question Tag: Capital Expenditure

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  • 15 Marks

FM – Nov 2022 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze the Chairman's proposals to improve EPS and discuss methods to align stakeholder objectives.

The Chairman of Opeyemi plc, a company listed on the Alternative Investment Market, has circulated a memorandum to the company’s directors and senior managers which contains the following statements:

“Looking to the year ahead, there are a number of measures which I propose to increase the company’s earnings per share (EPS).

Payments to trade creditors should be made as late as possible, even if this means extending our credit beyond the terms allowed by our suppliers. The company currently runs a substantial overdraft, and this measure will cut the level of bank interest and charges.

Relatively high capital expenditure in recent years has resulted in substantial depreciation charges in the profit or loss account. All capital spending, including that on the Oloro II project – designed to reduce toxic emissions from the manufacturing plant – should be postponed except where such spending can be shown to be essential to current operations.

Staff pay should be frozen at this year’s level for the forthcoming year. The company’s sponsorship of the local charity events run by the Staff Social Club should also, regrettably, be ended.

By boosting profits and therefore EPS, these measures will help us to achieve the highest possible stock market capitalisation.”

Required:

a. Prepare a response to the Chairman’s proposals which examines the possible consequences of the proposals for the price of the company’s shares and for the company’s stakeholders. (9 Marks)

b. Discuss FOUR ways that encourage managers to achieve stakeholder objectives. (6 Marks)

(Total 15 Marks)

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  • 15 Marks

TAX – May 2015 – L2 – SC – Q5 – Companies Income Tax (CIT)

Schedule of capital expenditure allocation for Covenant Construction Limited with assessment basis and treatment of capital expenditure.

Covenant Construction Limited commenced business on 3 August 2011, making up accounts to 31 July annually. The schedule of assets acquired prior to commencement of the business is as shown below:

Description ₦
Tractors and Grader 7,500,000
Motor vehicles for field operations 13,500,000
Construction site (Factory building) 11,250,000
Furniture, Fixtures and Fittings 778,250

Covenant Construction Limited won another contract and additional assets were purchased as stated below:

Date of Purchase Description Number of Items Cost (₦)
Nov. 2011 Plant & Machinery 3 580,000
April 2012 Motor vehicle 1 1,375,000
Aug. 2012 Building 1 1,350,000
Jan. 2013 Generator 1 450,000
June 2013 Factory extension 1 575,000
Nov. 2013 Pick-up van 2 1,050,000

At the last Board meeting, the Directors argued on what benefits will accrue to Covenant Construction Limited on Capital Expenditure incurred before and after commencement of business.

They were also interested in knowing the years that will be affected and the impact it will have on the company’s Total Profit.

You have been invited by the Finance Director of the company who asked you to look into these matters. The Finance Director has asked you to specifically address the following:

Required:

a. Prepare the schedule of Capital Expenditure Allocation and identify the Qualifying Expenditure based on which Capital Allowances are claimable: i. Normal basis of assessment (5 Marks)
ii. Revised basis of assessment (based on taxpayer’s right of election) (5 Marks)

b. Explain the treatment of Capital Expenditure acquired by Covenant Construction Limited before it commenced business on 3 August 2011. (2 Marks)

c. State the relevant tax years and corresponding basis period covered by the data above. (3 Marks)

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  • 20 Marks

FA – Nov 2020 – L1 – SB – Q5 – Elements of Financial Statements

Classify expenditure as capital or revenue and state recognition in financial statements.

Given below are items of revenue and capital expenditure:

  1. A number of new cars recently cleared by a motor car dealing company.
  2. Two new motor boats acquired by a ferry service agency.
  3. Vacant houses owned by an estate developing company, for which negotiations are ongoing for sale to prospective landlords.
  4. New buildings acquired for the purpose of holding items of plant and machinery belonging to a detergent manufacturing company.
  5. Cost of acquiring a leasehold property for office use.
  6. Granites purchased by an engineering contractor for use at a construction site.
  7. Cost of rehabilitating a dilapidated housing unit owned by an estate developer.
  8. Pre-production testing cost.

Required:

a. Using the tabular format below, classify the above transactions into capital or revenue expenditure. (8 Marks)

S/N | Capital Expenditure | Revenue Expenditure

b. State whether each of the items above will be recognized in the statement of profit or loss or in the statement of financial position. (8 Marks)

c. In respect of the information in (a) above, outline the details of information of the capital expenditure that should be included in the property, plant, and equipment (PPE) register. (4 Marks)

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  • 1 Marks

FA – Nov 2020 – L1 – SA – Q14 – Accounting for Property, Plant, and Equipment (IAS 16)

Identifies an item to be classified as capital expenditure.

Which of the following should be classified as capital expenditure?
A. Penalty paid to a supplier for late payment in respect of plant supplied
B. Interest payable on loan used exclusively for the production of self-constructed PPE
C. Staff training cost on the use of equipment
D. Legal fees on debt recovery
E. Bonuses to production operatives

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  • 1 Marks

FA – May 2013 – L1 – SA – Q12 – Accounting Concepts

This question tests the understanding of capital expenditure items.

Which of the following should be classified as capital expenditure?

A. The annual depreciation of leasehold premises
B. Computer repairs and maintenance cost
C. Solicitors’ fees in connection with the purchase of leasehold premises
D. The wages of the machine operators
E. The interest paid on a loan

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  • 1 Marks

FA – Nov 2015 – L1 – SA – Q13 – Elements of Financial Statements

This question identifies the best explanation of the term "Capital Expenditure."

Which of the following can best explain the term “Capital Expenditure”?
A. Expenditure relating to the issue of share capital
B. Expenditure on expensive assets
C. Expenditure relating to the acquisition or improvement of non-current assets
D. Expenditure on non-current assets including repairs and maintenance
E. Expenditure relating to entertainment of guests

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  • 1 Marks

BMF – May 2018 – L1 – SA – Q11 – Basics of Business Finance and Financial Markets

Distinguishing between revenue and capital expenditure.

Expenditure that does not create a long-term asset is called:
A. Capital expenditure
B. Investment expenditure
C. Revenue expenditure
D. Sundry expenditure
E. Capital budgeting expenditure

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  • 6 Marks

FA – Nov 2014 – L1 – SB – Q4a – Elements of Financial Statements

Classifying items as capital expenditure for the Statement of Financial Position.

State which of the following items should be classified as capital expenditure for the purpose of preparing the Statement of Financial Position:

i. The purchase of leasehold premises
ii. The annual depreciation of leasehold premises
iii. Solicitor’s fees in connection with the purchase of leasehold premises
iv. The costs of adding extra-storage capacity to a mainframe computer used by the business
v. Computer repairs and maintenance costs
vi. Profit on the sale of an office building
vii. Revenue from sales via credit cards
viii. The cost of new machinery procured
ix. Custom duty charged on machinery procured and imported into the country
x. The carriage costs of transporting new machinery from the supplier’s factory to the buyer’s premises
xi. The wages of the machine operators
xii. Cost of cleaning of the machine room
xiii. Cost of oil and other materials purchased for the repairs of machine

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  • 14 Marks

FA – Nov 2019 – L1 – SB – Q2c – Accounting for Property, Plant, and Equipment (PPE) in Accordance with IAS 16

Classify expenditure for plant into capital and revenue.

c. Ahmed Ventures Ltd acquired an item of plant from Judexco Machine Ltd to facilitate its operations.

The schedule of expenditure for the plant is given below:

Expenditure Item N’000 %
Purchase price 480,000 100%
Trade discount applicable to the purchase price 8%
Early settlement discount on the payable amount 5%
Freight charges 25,000
Pre-production testing cost 15,000
One-year maintenance contract 12,000
Staff cost in relation to the use of the machine 8,000
Electrical installation cost 19,000
Concrete reinforcement 9,000
Cost of correcting installation error 17,000
Dismantling and restoration cost 20,000
Staff training in the use of the plant 14,000

Required:
Using the format provided below, classify the above plant costs into capital and revenue expenditure respectively. (14 Marks)

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  • 6 Marks

FA – Nov 2019 – L1 – SB – Q2a & b – Accounting for Property, Plant, and Equipment (IAS 16)-

Explanation of IAS 16 requirements for initial recognition of Property, Plant, and Equipment (PPE).

a. Explain the requirements of IAS 16 on the initial recognition of Property, Plant, and Equipment (PPE).

(3 Marks)

b. After the acquisition of an item of PPE, an entity continues to incur subsequent expenditure on the item.

Required:
Explain briefly the requirements of IAS 16 in relation to subsequent expenditure and subsequent measurement. (3 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze the Chairman's proposals to improve EPS and discuss methods to align stakeholder objectives.

The Chairman of Opeyemi plc, a company listed on the Alternative Investment Market, has circulated a memorandum to the company’s directors and senior managers which contains the following statements:

“Looking to the year ahead, there are a number of measures which I propose to increase the company’s earnings per share (EPS).

Payments to trade creditors should be made as late as possible, even if this means extending our credit beyond the terms allowed by our suppliers. The company currently runs a substantial overdraft, and this measure will cut the level of bank interest and charges.

Relatively high capital expenditure in recent years has resulted in substantial depreciation charges in the profit or loss account. All capital spending, including that on the Oloro II project – designed to reduce toxic emissions from the manufacturing plant – should be postponed except where such spending can be shown to be essential to current operations.

Staff pay should be frozen at this year’s level for the forthcoming year. The company’s sponsorship of the local charity events run by the Staff Social Club should also, regrettably, be ended.

By boosting profits and therefore EPS, these measures will help us to achieve the highest possible stock market capitalisation.”

Required:

a. Prepare a response to the Chairman’s proposals which examines the possible consequences of the proposals for the price of the company’s shares and for the company’s stakeholders. (9 Marks)

b. Discuss FOUR ways that encourage managers to achieve stakeholder objectives. (6 Marks)

(Total 15 Marks)

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  • 15 Marks

TAX – May 2015 – L2 – SC – Q5 – Companies Income Tax (CIT)

Schedule of capital expenditure allocation for Covenant Construction Limited with assessment basis and treatment of capital expenditure.

Covenant Construction Limited commenced business on 3 August 2011, making up accounts to 31 July annually. The schedule of assets acquired prior to commencement of the business is as shown below:

Description ₦
Tractors and Grader 7,500,000
Motor vehicles for field operations 13,500,000
Construction site (Factory building) 11,250,000
Furniture, Fixtures and Fittings 778,250

Covenant Construction Limited won another contract and additional assets were purchased as stated below:

Date of Purchase Description Number of Items Cost (₦)
Nov. 2011 Plant & Machinery 3 580,000
April 2012 Motor vehicle 1 1,375,000
Aug. 2012 Building 1 1,350,000
Jan. 2013 Generator 1 450,000
June 2013 Factory extension 1 575,000
Nov. 2013 Pick-up van 2 1,050,000

At the last Board meeting, the Directors argued on what benefits will accrue to Covenant Construction Limited on Capital Expenditure incurred before and after commencement of business.

They were also interested in knowing the years that will be affected and the impact it will have on the company’s Total Profit.

You have been invited by the Finance Director of the company who asked you to look into these matters. The Finance Director has asked you to specifically address the following:

Required:

a. Prepare the schedule of Capital Expenditure Allocation and identify the Qualifying Expenditure based on which Capital Allowances are claimable: i. Normal basis of assessment (5 Marks)
ii. Revised basis of assessment (based on taxpayer’s right of election) (5 Marks)

b. Explain the treatment of Capital Expenditure acquired by Covenant Construction Limited before it commenced business on 3 August 2011. (2 Marks)

c. State the relevant tax years and corresponding basis period covered by the data above. (3 Marks)

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  • 20 Marks

FA – Nov 2020 – L1 – SB – Q5 – Elements of Financial Statements

Classify expenditure as capital or revenue and state recognition in financial statements.

Given below are items of revenue and capital expenditure:

  1. A number of new cars recently cleared by a motor car dealing company.
  2. Two new motor boats acquired by a ferry service agency.
  3. Vacant houses owned by an estate developing company, for which negotiations are ongoing for sale to prospective landlords.
  4. New buildings acquired for the purpose of holding items of plant and machinery belonging to a detergent manufacturing company.
  5. Cost of acquiring a leasehold property for office use.
  6. Granites purchased by an engineering contractor for use at a construction site.
  7. Cost of rehabilitating a dilapidated housing unit owned by an estate developer.
  8. Pre-production testing cost.

Required:

a. Using the tabular format below, classify the above transactions into capital or revenue expenditure. (8 Marks)

S/N | Capital Expenditure | Revenue Expenditure

b. State whether each of the items above will be recognized in the statement of profit or loss or in the statement of financial position. (8 Marks)

c. In respect of the information in (a) above, outline the details of information of the capital expenditure that should be included in the property, plant, and equipment (PPE) register. (4 Marks)

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  • 1 Marks

FA – Nov 2020 – L1 – SA – Q14 – Accounting for Property, Plant, and Equipment (IAS 16)

Identifies an item to be classified as capital expenditure.

Which of the following should be classified as capital expenditure?
A. Penalty paid to a supplier for late payment in respect of plant supplied
B. Interest payable on loan used exclusively for the production of self-constructed PPE
C. Staff training cost on the use of equipment
D. Legal fees on debt recovery
E. Bonuses to production operatives

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  • 1 Marks

FA – May 2013 – L1 – SA – Q12 – Accounting Concepts

This question tests the understanding of capital expenditure items.

Which of the following should be classified as capital expenditure?

A. The annual depreciation of leasehold premises
B. Computer repairs and maintenance cost
C. Solicitors’ fees in connection with the purchase of leasehold premises
D. The wages of the machine operators
E. The interest paid on a loan

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  • 1 Marks

FA – Nov 2015 – L1 – SA – Q13 – Elements of Financial Statements

This question identifies the best explanation of the term "Capital Expenditure."

Which of the following can best explain the term “Capital Expenditure”?
A. Expenditure relating to the issue of share capital
B. Expenditure on expensive assets
C. Expenditure relating to the acquisition or improvement of non-current assets
D. Expenditure on non-current assets including repairs and maintenance
E. Expenditure relating to entertainment of guests

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  • 1 Marks

BMF – May 2018 – L1 – SA – Q11 – Basics of Business Finance and Financial Markets

Distinguishing between revenue and capital expenditure.

Expenditure that does not create a long-term asset is called:
A. Capital expenditure
B. Investment expenditure
C. Revenue expenditure
D. Sundry expenditure
E. Capital budgeting expenditure

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  • 6 Marks

FA – Nov 2014 – L1 – SB – Q4a – Elements of Financial Statements

Classifying items as capital expenditure for the Statement of Financial Position.

State which of the following items should be classified as capital expenditure for the purpose of preparing the Statement of Financial Position:

i. The purchase of leasehold premises
ii. The annual depreciation of leasehold premises
iii. Solicitor’s fees in connection with the purchase of leasehold premises
iv. The costs of adding extra-storage capacity to a mainframe computer used by the business
v. Computer repairs and maintenance costs
vi. Profit on the sale of an office building
vii. Revenue from sales via credit cards
viii. The cost of new machinery procured
ix. Custom duty charged on machinery procured and imported into the country
x. The carriage costs of transporting new machinery from the supplier’s factory to the buyer’s premises
xi. The wages of the machine operators
xii. Cost of cleaning of the machine room
xiii. Cost of oil and other materials purchased for the repairs of machine

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  • 14 Marks

FA – Nov 2019 – L1 – SB – Q2c – Accounting for Property, Plant, and Equipment (PPE) in Accordance with IAS 16

Classify expenditure for plant into capital and revenue.

c. Ahmed Ventures Ltd acquired an item of plant from Judexco Machine Ltd to facilitate its operations.

The schedule of expenditure for the plant is given below:

Expenditure Item N’000 %
Purchase price 480,000 100%
Trade discount applicable to the purchase price 8%
Early settlement discount on the payable amount 5%
Freight charges 25,000
Pre-production testing cost 15,000
One-year maintenance contract 12,000
Staff cost in relation to the use of the machine 8,000
Electrical installation cost 19,000
Concrete reinforcement 9,000
Cost of correcting installation error 17,000
Dismantling and restoration cost 20,000
Staff training in the use of the plant 14,000

Required:
Using the format provided below, classify the above plant costs into capital and revenue expenditure respectively. (14 Marks)

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You're reporting an error for "FA – Nov 2019 – L1 – SB – Q2c – Accounting for Property, Plant, and Equipment (PPE) in Accordance with IAS 16"

  • 6 Marks

FA – Nov 2019 – L1 – SB – Q2a & b – Accounting for Property, Plant, and Equipment (IAS 16)-

Explanation of IAS 16 requirements for initial recognition of Property, Plant, and Equipment (PPE).

a. Explain the requirements of IAS 16 on the initial recognition of Property, Plant, and Equipment (PPE).

(3 Marks)

b. After the acquisition of an item of PPE, an entity continues to incur subsequent expenditure on the item.

Required:
Explain briefly the requirements of IAS 16 in relation to subsequent expenditure and subsequent measurement. (3 Marks)

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