Cadence Cycle Works buys a used delivery van and, before the van carries anything at all, pays a workshop to fit shelving and a roof rack for finished wheel...
Question 1 Report
Cadence Cycle Works buys a used delivery van and, before the van carries anything at all, pays a workshop to fit shelving and a roof rack for finished wheels. The owner must decide where the fitting charge belongs. Identify the correct treatment.
Answer Details
The test for capital expenditure is whether the spending brings a non-current asset into the condition and location needed for its intended use. The shelving and roof rack were fitted before the van carried anything, so they are part of getting the van ready to work, not part of running it. The correct treatment is capital expenditure, added to the cost of the van, and the whole figure is then depreciated over the van's useful life.
Motor running expenses cover fuel, tax, insurance and similar costs of using the van once it is in service. The repairs account is for restoring an asset to its previous condition, which is not what a first fitting does. The van is a non-current asset held for use, not inventory held for resale, so nothing here can be added to inventory.
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