Capital vs. Revenue Expenditure in Rental Property

Steps:

• Recall capital expenditure improves or expands fixed assets, increasing value or useful life, while revenue covers maintenance and operations.
• Assess each cost: Does it enhance the asset long-term or just maintain it?
• Classify based on accounting principles: Improvements like additions are capital; repairs or fees are revenue.
• Select the option that clearly adds significant value to the property.

Why A is correct:

• Extending the kitchen area is an improvement that increases the property's size and utility, treated as capital expenditure per IAS 16, which capitalizes costs enhancing asset capacity.

Why the others are wrong:

• B: Legal fees for a tenancy agreement are operational costs related to renting, classified as revenue expenditure.
• C: Repainting maintains the property's condition without adding value, so it's revenue expenditure for repairs.
• D: Replacing a water pipe is a routine repair to restore functionality, not an enhancement, making it revenue expenditure.

Final answer: A