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    Question

    A company purchases machinery for ₹10 lakhs and incurs

    ₹1 lakh on its installation. The accountant records the total ₹11 lakhs under the fixed asset head. However, a junior accountant argues that the installation should be treated as a revenue expense. Considering the nature of the transaction and accounting principles, how should this cost be classified?
    A As a capital expenditure because it enhances the future benefit Correct Answer Incorrect Answer
    B As a revenue expenditure because it's incurred after purchase Correct Answer Incorrect Answer
    C As a deferred revenue expense to be written off over time Correct Answer Incorrect Answer
    D As a non-operating expenditure, not to be recorded in the books Correct Answer Incorrect Answer
    E As part of the cost of the asset, capitalized and depreciated over its useful life Correct Answer Incorrect Answer

    Solution

    Installation cost is necessary to bring the asset to its working condition. Hence, it's capitalised along with the cost of the asset.

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