1
Why is the difference between classifying something as capital expenditure rather than
revenue expenditure, and vice versa, so important to the users of financial statements?
2
John Boggis saw a computer for sale in a local store for £1,499. This was much cheaper
than he’d seen it for sale elsewhere. He needed five of these PCs and also needed the cabling to
network them. Following negotiations with the retailer, he obtained the machines for a total of
£7,000. However, the cost of the cabling was £300 and the supplier was going to charge £500
to install the network. If John paid the total amount due before installation, he would receive a
discount of 21/2 per cent. He liked this idea and paid immediately.
Subsequently, he purchased three printers costing £125 each and software costing £350,
together with CDs and other consumables costing a total of £250. The supplier gave a discount of
£50 on the consumables due to the size of the order.
All of John’s staff were sent on a customised training course organised by the retailer at a total
cost of £500.
Required:
(a) Calculate the amount capitalised in the balance sheet and also the amount to be charged to
revenue accounts.
(b) ‘Materiality’ is a concept which sometimes has an effect on the capitalisation of amounts
within a balance sheet. Give examples of how this may be done.