A shipping company bought a second-hand ship. The ship underwent a Lloyd’s survey that concluded the ship needed extensive repairs to make it seaworthy. The survey was performed six months after purchase and after an initial voyage. The shipping company commissioned the repairs and claimed the cost as a revenue expense. It was decided that part of the expense related to period during which the company operated the ship. However the majority related to cost of acquiring the ship and was therefore capital.
It was observed that the seller would have demanded a higher selling price except for the immediately necessary repairs.