Question

2. Sale of Hotel furniture and room amenities ASH Muscat features stunning luxury suites with views of the ocean, mountain, garden or city from a spacious balcony. Exclusive amenities include living area with sofa, king bedroom, generous work area, complimentary high-speed Internet access, and marble bath with tub and walk-in shower. Master suite features four-poster king bed with choice of king or twin beds in additional room. Sofa and king sizes beds are being imported from Thailand and incurred costs of import duties, Luxury tax, carriage cost other than the buying price of furniture. A maintenance contract for this furniture was signed with an Omani company for OMR 4000 per year and further repainting cost of OMR 5000 will incur annually. ASH Muscat on 1 January 2015, purchased new hotel furniture and room amenities at a cost of OMR 200000. For the purpose of accounting for depreciation, the company has decided the following: i. The room amenities part was OMR 50000 and this would not be depreciated. ii. The room furniture part was the remaining OMR 150000. This would be depreciated by the straight-line method to a nil residual value over 20 years. After five years of trading, on 1 January 2020 ASH Muscat decides that the company hotel furniture and room amenities are now worth OMR 300000, divided into: hotel furniture OMR 150000 and room amenities OMR 150000. The company estimates that the hotel furniture still has a further 20 years of useful life remaining. ASH Muscat is planning to sell a part of hotel furniture for OMR 3000 on 1st January 2021. The costs of hotel furniture were OMR 15000 and depreciated 5 years out of 20 years. a) Differentiate capital expenditures from revenue expenditures and give case related examples from the above discussion.

Answer 1

Answer:

Capital expenditures:

Capital expenditures are a money spend by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.

There different types of capital expenditure, for example, Money spent for business purposes, Purchasing of Plants and machinery items, Electric power equipment and Permanent additions to existing fixed assets etc.

Revenue expenditures:

Revenue expenditures are not the high-value items, instead, they are the routine expenditures that takes place in the normal business. In other words, this kind of expenditure maintains fixed assets.

Direct Expenses: These include the cost of manufacturing of raw material to turn it into a finished product. For instance, Productive wages and salaries to workers, shipping costs, legal expenses, electricity, and water bills, fuels costs, rent, commissions, packaging charges.

Indirect Expenses: These connect with only selling and distributing goods other than manufacturing. For example, salaries, depreciation, machinery, items of furniture and fixing, etc.

Case Related Examples:

Capital Expenditure - Purchase of furniture

Revenue Expenditure - Maintenance cost & repainting cost