Which of the following expenses should not be treated as capital expenditure?
Correct answer: C. Legal expenses incurred to defend a suit related to title of patent.
- A. Expenses paid on installation of a plant.
- B. Cost of dismantling a building in case a new building is to be constructed on the land
- C. Legal expenses incurred to defend a suit related to title of patent.
- D. The fees paid to engineer who constructed the plant.
Explanation
Legal expenses for defending an existing patent title do not create or improve a capital asset, so they are treated as revenue expenditure. Installation, dismantling costs connected with new construction, and professional fees for constructing a plant form part of its capital cost.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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