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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 None of these 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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