(a) Distinguish between capital and revenue expenditure.

(b) Napa Ltd took delivery of a PC and printer on 1 July 2006, the beginning of its financial year.

The list price of the equipment was £4,999 but Napa Ltd was able to negotiate a price of

£4,000 with the supplier. However, the supplier charged an additional £340 to install and test the equipment. The supplier offered a 5% discount if Napa Ltd paid for the equipment and the additional installation costs within seven days. Napa Ltd was able to take advantage of this additional discount. The installation of special electrical wiring for the computer cost £110.

After initial testing certain modifications costing £199 proved necessary. Staff were sent on special training courses to operate the PC and this cost £990. Napa Ltd insured the machine against fire and theft at a cost of £49 per annum. A maintenance agreement was entered into with Sonoma plc. Under this agreement Sonoma plc promised to provide 24 hour breakdown cover for one year. The cost of the maintenance agreement was £350.

Required:

Calculate the acquisition cost of the PC to Napa Ltd.

(c) The following costs were also incurred by Napa Ltd during the financial year ended 30 June 2007:

(1) Interest on loan to purchase PC.

(2) Cost of software for use with the PC.

(3) Cost of customising the software for use in Napa Ltd’s business.

(4) Cost of paper used by the computer printer.

(5) Wages of computer operators.

(6) Cost of ribbons used by the computer printer.

(7) Cost of adding extra memory to the PC.

(8) Cost of floppy disks used during the year.

(9) Costs of adding a manufacturer’s upgrade to the PC equipment.

(10) Cost of adding air conditioning to the computer room.

Required:

Classify each of the above as capital expenditure or revenue expenditure.