19b23Fixed Assets2

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Amity International Business School

Semester 1

Accounting for Managers


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Amity International Business SchoolObjective

In this session we will learn about Capital and Revenue Expenditure


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Capital Expenditure Expenditures for the acquisition of fixed

assets and are recorded in the assetaccounts

Expenditures that extend the useful life,improve the quality of output, or reduceoperating costs of an existing fixed assetbeyond their originally estimated levels


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Revenue Expenditures Expenditures for ordinary repairs,

maintenance, fuel, insurance or other items needed to maintain and use

buildings, and plant and equipment They go to expense accounts and reduce

the income of the period in which they

incurred, because the benefits from theseexpenditures do not last beyond thatperiod


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Expenditure A practical approach is to treat any

expenditure that will benefit severalaccounting periods as a capitalexpenditure, and any expenditure that willbenefit only the current accounting periodas a revenue expenditure


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Expenditure Expenditures on additions and

improvements to assets are treated ascapital expenditures

The construction of an additional floor in abuilding increases the capacity of anexisting asset and should be capitalised


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Expenditure Additions or improvements to an existing

asset, which become an integral part of the asset, should be depreciated over itsremaining useful life, although in practicethe cost of improvement may be added tothe gross block of the asset and

depreciated at the rate used for the asset


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Repairs Ordinary repairs are expenditures incurred

to maintain assets in good workingcondition

Periodic replacements of fused bulbs andworn-out car tyres, oiling and cleaning of equipment, and painting of buildings aretreated as ordinary repairs since theseexpenditures are fairly regular and theybenefit the year in which they are incurred


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Repairs Major repairs are different as they benefit

a number of periods E.g. the benefit of relining a steel furnace

or of a major rectification of an aircraftengine will go beyond the current year

Most businesses expense these amountsover the periods in which they expect tobenefit


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Amity International Business SchoolExample

A car bought at a cost of Rs. 2,50,000 two yearsago undergoes some major repairs at a cost of Rs. 40,000

The useful life of the car at the time of thepurchase was estimated at five years, and theresidual value at Rs. 25,000

Depreciation is on the straight-line basis

As a result of the repairs, the life of the car isestimated to be extended by two years, while theresidual value would be unchanged


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Amity International Business SchoolExampleContd.

Cost Rs. 2,50,000Less Residual Value - 25,000Original Depreciable Amount 2,25,000

Less Accumulated Depreciation - 90,000Remaining Depreciable Amount 1,35,000

Add Major Repairs + 40,000New Depreciable Amount 1,75,000Remaining Useful Life 5 YearsRevised Depreciation Expense 1,75,000 / 5 Years

Rs. 35,000 / Year


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Amity International Business SchoolRepairs

An enterprise may relocate its factory, or rearrange and reinstall a group of machines in a plant, for improving

efficiency, and incur substantialexpenditures for this purpose These expenditures usually benefit a

number of periods, and are expensed over the periods in which the benefits arerealized


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Amity International Business SchoolExercise

Shekhar Company bought a boiler for Rs. 700,000 The boiler was expected to last eight years, with an

estimated residual value of Rs. 60,000 at the end of thatperiod

After using the boiler for five years, the company carriedout some repairs to it at a cost of Rs. 1,50,000 to improveits thermal efficiency as well as reduce the level of carbonemission

As a result, the remaining useful life of the boiler isexpected to increase by two years

Its estimated residual value is not affected The company provides straight-line depreciation Compute the yearly depreciation expense after the repairs


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Depreciation in Income Tax Returns Income Tax rules permit tax payers to claim

depreciation benefits at the prescribed ratesusing written-down-value method

Tax rules do not permit other methods such asthe straight-line method The tax law permits accelerated write-off of

asset costs by prescribing recovery periods that

are shorter than the estimated useful lives for accounting purposes as well as permittingrecovery of a large portion of the cost of theinvestments in the early years


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Depreciation Allowance Rates for Tax Purposes

Class of Assets Depreciation AllowanceRate (%)

Buildings 5 to 100

Furniture and Fittings 10Machinery and Plant 15 to 100

Ships 20

Aeroplanes, aeroengines 40


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Depreciation Schedule: Income Tax ReportingYear Calculation Yearly

Depreciation AccumulatedDepreciation

EndingBookValue

1 8,00,000x40% 3,20,000 3,20,000 4,80,000

2 4,80,000x40% 1,92,000 5,12,000 2,88,0003 2,88,000x40% 1,15,200 6,27,200 1,72,800

4 1,72,800x40% 69,120 6,96,320 1,03,680

5 1,03,680x40% 41,472 7,37,792 62,208

6 62,208x40% 24,883 7,62,675 37,325


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Amity International Business SchoolRecap

In this session we learnt about Fixed Assets


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Next Session In the next session we will learn about

Liabilities

Documents

19b23Fixed Assets2