After studying this chapter, you will be able to
Define Depreciation
Know the Characteristic Features of “Depreciation”
Understand the Accounting Concept of Depreciation
Know the Salient Features of Depreciation
Understand the Causes of Depreciation
Know the Need for Depreciation
Understand the Factors that Affect Depreciation
To Calculate Depreciation for the Period for Which Depreciation is to be Charged Depending on Different Types of Problems
Understand Methods of Accounting Entries for Recording Depreciation
Understand Methods of Providing (Allocating) Depreciation
Understand the Meaning, Formula, Merits, Demerits and Applicability of Straight Line Method
Calculate the Rate and Amount of Depreciation Under Straight Line Method
Understand the Meaning, Formula, Merits, Demerits and Suitability of Written Down Value Method
Distinguish Between Straight Line Method and Written Down Value Method
Compute Machinery Account and Ascertain Profit/Sale on Asset
Understand the Accounting Treatment for Creating Provision for Depreciation and Accumulated Depreciation
Understand the Procedure for Change in the Method of Depreciation as per Accounting Standard (AS) – 6
Complete and Prepare Machinery Account, When There is a Change in the Method of Depreciation
Understand the Concept of Annuity Method and Accounting Treatment Under This Method
Understand the Main Features of Sinking Fund Method
Differentiate Annuity Method and Sinking Fund Method
Understand the Sum-of-the-Years’-Digits Method
Choose a Method of Depreciation
Answer: Is Depreciation a Source of (Income) Funds?
Understand the Meaning, Objectives, Examples of Accounting Treatment and Disclosure Relating the “Provisions”
Understand the Meaning and Objectives of “Reasons” and to Distinguish Between “Provision” and “Reserve”
Understand Different Types of Reserves and Their Meanings
Understand the Term “Provision for Repairs and Renewals” and Its Accounting Treatment
Understand the Salient Features of Accounting Standard (AS) – 6
To understand “what depreciation means” we have to expose the intricacies inherent in this word by way of the following detailed facts associated with the term. Every going concern acquires different types of assets broadly categorized into Fixed Assets and Current Assets. It is a fact that fixed assets are generally used for a longer period (i.e., more than one accounting period) and they are not for resale without using in the business activities). Despite the fact that fixed assets have longer life, they cannot be held perpetually in a concern. Fixed assets will have to loose their value over a period of time. At this stage one may say that the fall in value or quality of fixed assets may be connected with the term “Depreciation.” But the word Depreciation denotes many more factors.
According to the Institute of Chartered Accountants of India, “Depreciation is a measure of the wearing out or other loss of value of a depreciable asset arising from use, time or obsolescence. Depreciation is allocated so as to charge a fair proportion of the cost in each accounting period during the Expected Useful Life of the Asset. Depreciation includes amortization”. This is the Accounting Standard (AS) – 6.
According to the Institute of Chartered Accounts of England, “Depreciation represents that part of the cost of a fixed asset to its owner which is not recoverable when the asset is finally out of use by him. Provision against this loss of capital is an integral cost of conducting the business during the effective commercial life of the asset and is not dependent on the amount of profit earned”.
A careful analysis of the definition throws light on its character and extends its coverage by inclusion of some more terms like obsolescence, depletion and amortization.
First, we shall look into its characteristic features:
According to American Institute of Certified Public Accountants. “Depreciation Accounting is a system of accounting which aims to distribute cost or the basic value of tangible capital assets loss salvage, if any, over the estimated useful life of the unit (which may be group of assets) in a systematic and rational manner. It is a process of allocation and not of valuation.
On the basis of above discussion (i.e., based on definition of depreciation and meaning of depreciation accounting) the following salient features come into light on “Depreciation.”
The causes for the decline in the usefulness of asset may be due to physical and functional factors.
Physical loss of an asset is due to
The need for charging a reasonable amount of depreciation arises for the following purpose or objectives.
1. True Results of Operations: It is necessary to charge the depreciation against income in each accounting period. Otherwise, the result of operations will not be fair and true.
2. True and Fair View of Financial Position: In the absence of depreciation charge, assets have to be shown at their original cost every year in the final accounts. In order to show true and fair final position, assets will have to be shown at cost less depreciation.
3. Proper Cost of the Product: Depreciation forms part of production like other expenses. In the absence of depreciation charge, cost records may not reveal true account of cost of production. To ascertain the proper cost of the product, it is imperate to provide for prescribed depreciation.
4. Funds for Replacements of Assets: A portion of profit is to be set aside in the form of depreciation every year which facilitates the task of replacement of assets at the end of its life. Without any additional financial burden, assets can be replaced in such accumulated depreciation provisions.
5. Legal Requirements: Legal requirements can be complied with, (as in case of companies) by way of charging depreciation on assets.
6. Allocation of Cost of Fixed Assets: The main objective of depreciation accounting is to allocate the cost of fixed asset to respective accounting periods which benefit from the use of the asset which can be achieved by charging depreciation.
7. Impact on Tax-Liability: Rate of depreciation is influenced by the tax-laws and thereby helps the tax liability to a certain extent.
The amount of annual deprecation is based on the following factors:
1. Historical Cost: The cost includes all costs incurred in acquiring the depreciable fixed assets on its acquisition, installation and commissioning (e.g., invoice price, legal charges, freight, transport and so on.)
2. Estimated Useful Life: This depends on the intensity of use, standard of maintenance and the replacement policy of the management.
3. Estimated Residual Value (Scrap Value) (Salvage Value): The salvage value means the estimated amount that may be recovered on its sale or exchange for a new asset at the end of its useful service life.
Following alternatives may be adopted to charge depreciation on assets purchased during the year:
Type | Period for which depreciation is to be charged |
---|---|
(A) If the rate of depreciation is expressed as … % without the words of per annum (p.a.) |
|
(i) When date of purchase or sale is not given |
Depreciation is to be calculated for the full accounting period |
(ii) When date of purchase or sale is given |
Depreciation is to be computed on the basis of time factor unless the examination problem requires otherwise |
(B) If the rate of deprecation … % with the words p.a. is given (e.g. 12% p.a.) |
|
(i) If the date of the acquisition is given |
(i) Depreciation is charged for the period beginning with the date acquisition and ending with the date of closing period |
(ii) If the date of acquisition is NOT given |
(ii) Assumption I: Assume that the asset was purchased in the beginning and charge the depreciation for a full year Assumption II: Assume that the asset was purchased in the middle of the year and charge the depreciation for half of the year Assumption III: Assume that the asset was purchased at the end of the accounting period and no depreciation is to be charged [Students are asked to put a note in any such case.] |
Following are the two alternative methods of accounting entries for recording depreciation:
This accounting procedure is applicable to all the methods of depreciation except Sinking Fund Method.
Under this method of recording depreciation, it is directly credited to the “respective asset account” with the result that the respective asset account appears in the Balance Sheet at its book value or cost value less depreciation for the accounting period.
Under this method, the asset account is not at all affected by the depreciation amount. Asset appears in the books (Ledger and Balance Sheet) at its original cost until sold or discarded.
The amount stands in the credit side of the Provision for Depreciation Account depicts the total amount of depreciation accumulated to date. When the asset is sold, that accumulated amount in the Provision for Depreciation Account is transferred to the respective asset account and closed.
Difference between these two methods of accounting:
Directly Charged to Asset A/c | Provision for Depreciation |
---|---|
1 The asset is shown in the Balance Sheet at its cost or book value less depreciation relating to that accounting period. |
1 The asset always appears at its original cost in the Ledger and the Balance Sheet. |
2 Total amount of depreciation cannot be ascertained from a single Balance Sheet. |
2 Total amount of depreciation written off up to date can be ascertained even from the last single Balance Sheet. |
3 It is difficult to assess, whether the asset is new or old or when purchased, in the absence of any accounting information. |
3 It is very easy to find out the age of asset with the help of cost of asset and accumulated depreciation. |
Journal entries which will have to be passed under the method (charging direct to the asset):
|
Asset A/c |
Dr. |
|
To Cash/Bank A/c |
|
|
(Being the Asset purchased.) |
|
|
Depreciation A/c |
Dr. |
|
To Asset A/c |
|
|
(Being the depreciation provided.) |
|
|
Profit and Loss A/c |
Dr. |
|
To Depreciation A/c |
|
|
(Being the Depreciation transferred to Profit and Loss A/c.) |
|
|
Cash/Bank A/c |
Dr. |
|
To Asset A/c |
|
|
(Being the asset sold.) |
|
|
Asset A/c |
Dr. |
|
To Profit and Loss A/c |
|
|
(Being the transfer of profit on sale.) |
|
|
Profit and Loss A/c |
Dr. |
|
To Asset A/c |
|
|
(Being the transfer of loss on sale.) |
|
There are several methods of allocating depreciation. They are
The most commonly used methods are
Under this method:
Under this method, the depreciation charge is not affected by the extent of the use of the asset, its age or efficiency.
While applying the formula, the following hints will be of much use to the students:
This method can yield rich dividends for those assets which have less repair charge and less chances of obsolescence. This method is suitable for patent, copyright, trademark, lease and so on.
Illustration: 1
Calculate the rate of depreciation under Straight Line Method:
Purchase Price of Machine |
= |
Rs 4,00,000 |
Expenses to be Capitalized |
= |
Rs 2,00,000 |
Estimated Residual Value |
= |
Rs 2,00,000 |
Expected Useful Life |
= |
5 years |
Solution
Step 1: Calculation of Total Cost of Asset
Remember |
|
|
Total Cost of Asset = Purchase Price + Expenses to be Capitalized |
|
|
= |
Rs 4,00,000 + Rs 2,00,000 |
|
|
= |
Rs 6,00,000 |
Step 2: Calculation of amount of depreciation per year
Remember |
|
|
Amount of Deprecation |
|
|
= |
Total Cost of Asset – Estimated Scrap Value/Expected Useful Life |
|
|
= |
Rs 6,00,000 – Rs 2,00,000/5 years = Rs 4,00,000/5 |
|
|
= |
Rs 80,000 |
Step 3: Calculation of Rate of Depreciation
Remember |
|
|
Rate of Depreciation = Amount of Depreciation/Total Cost of Asset × 100 |
|
|
= |
Rs 80,000/ Rs 5,00,000 × 100 = 16%. |
Illustration: 2
A machine is purchased for Rs 4,00,000. Expenses incurred on it Rs 1,00,000. The residual value at the end of its expected useful life of 4 years is estimated at Rs 2,00,000. Calculate the amount of depreciation for the first year ending on Mar 31, 2009 if it is purchased on:
Solution
Step 1: Total cost of asset is to be calculated
|
|
(Total) Cost of Asset = Purchase Price + Expenses |
|
= |
Rs 4,00,000 + Rs 1,00,000 |
|
= |
Rs 5,00,000 |
Step 2: Amount of depreciation per year is calculated
Amount of Depreciation per year
|
= |
Total Cost of Asset – Estimated Residual Life/Expected Useful Life |
|
= |
Rs 5,00,000 – Rs 2,00,000/4 = Rs 75,000 per year |
Step 3: Amount of depreciation for the first year of purchase
Case (a): Date of purchase Apr 1, 2008
From Apr 1, 2008 to Mar 31, 2009: 12 months
∴ Amount of depreciation for 12 months, i.e. 1 year = Rs 75,000
(as per Step 2)
Case (b): Date of purchase: July 1, 2008
From July 1, 2008 to Mar 31, 2009 = 9 months
Amount of deprecation for 12 months = Rs 75,000
∴ Amount of depreciation for 9 months = Rs 75,000×9/12 = Rs 56,250
Case (c): Date of purchase = Oct 1, 2008
From Oct 1, 2008 to Mar 31, 2009 = 6 months
Amount of Depreciation for 6 months = 6/12×75,000 = Rs 37,500
Case (d): Date of purchase: Jan 1, 2009
From Jan 1, 2009 to Mar 31, 2009 = 3 months
Amount of Depreciation = 3/12 × 75,000 = Rs 18,750.
Illustration: 3
A machine is purchased for Rs 8,00,000. Expenses incurred on its cartage and installation Rs 1,00,000. Calculate the amount of depreciation @ 10% p.a. as per Straight Line Method for the first year ending on Mar 31, 2009, if the machine is purchased on
Solution
Step 1: Calculation of total cost of asset
Total Cost of Asset = Purchase Price + Expenses
|
= |
Rs 8,00,000 + Rs 1,00,000 |
|
= |
Rs 9,00,000 |
Step 2: Amount of depreciation
|
= |
Total Cost of Asset × Rate/100 × Period/12 months |
Case (a): Purchase is on Apr 1, 2008
Period = from Apr 1, 2008 to Mar 31, 2009 = 12 months
Amount of depreciation for 12 months = Rs 9,00,000 × 10/100 × 12/12
= Rs 90,000
Case (b): Purchase is on July 1, 2008
Period = from July 1, 2008 to Mar 31, 2009 = 9 months
Amount of depreciation for 9 months = Rs 9,00,000 × 10/100 × 9/12
= Rs 67,500
Case (c): Purchase is on Oct 1, 2008
Period = From Oct 1, 2008 to Mar 31, 2009 = 6 months
∴ Amount of depreciation for 6 months = Rs 9,00,000 × 10/100 × 6/12
= Rs 45,000
Case (d): Purchase is on Jan 1, 2009
Period = From Jan 1, 2009 to Mar 31, 2009 = 3 months
Amount of depreciation for 9 months = Rs 9,00,000 × 10/100 × 3/12
= Rs 22,500
Illustration: 4
A company purchased a second-hand machine on Apr 1, 2007 for Rs 1,50,000 and spent Rs 50,000 on its repairs. Depreciation is to be provided @ 10% as per Straight Line Method. The machine was sold for Rs 1,00,000. Accounting year is financial year. Calculate the profit/loss on sale of machine, on Mar 31, 2009.
Solution
Step 1: Total Cost of Asset = Purchase Price + Expense
|
= |
Rs 1,50,000 + Rs 50,000 = Rs 2,00,000 |
Step 2: Depreciation
Period = from Apr 1, 2007 to Mar 31, 2009 = 24 months
Amount of Depreciation for 24 months
|
= |
Rs 2,00,000 × 10/100 × 24/12 |
|
= |
Rs 40,000 |
Step 3: Book value as on date of sale
(Step 1 – Step 2) = Rs 2,00,000 – Rs 40,000
= Rs 1,60,000
Step 4: Sale proceeds = Rs 1,00,000
Step 5: Book Value − Sale Proceeds
Rs 1,60,000 – Rs 1,00,000
= Rs 60,000 (Profit)
Hence, profit on Sale = Rs 60,000.
Illustration: 5
On Apr 1, 2006 X Ltd purchased a second-hand machine for Rs 1,60,000 and spent Rs 40,000 on its cartage and installation. The residual value at the end of its expected useful life of 4 years is estimated at Rs 80,000. On Sep 30, 2008. This machine is sold for Rs 1,00,000. Depreciation is to be provided according to Straight Line Method.
You are required to pass Journal entries in the books of X Ltd and prepare Machinery Account and Depreciation Account for the first three years assuming that the accounts are closed on Mar 31, each year.
Solution
Stage I First, rate of depreciation is calculated
= Rs 2,00,000 – Rs 80,000/4 = Rs 30,000
= Rs 30,000/Rs 2,00,000 × 100 = 15%
Stage II Next, profit/loss on sale of asset is to be computed
Rs |
||
---|---|---|
(i) |
Total Cost of Asset (Rs 1,600,000 + Rs 40,000) |
2,00,000 |
(ii) |
Less: Depreciation from the date of purchase to date of sale (Rs 2,00,000 × 15/100 × 30/12) |
75,000 |
(iii) |
Book value as on date of sale (i) – (ii) |
1,25,000 |
(iv) |
Less: Sale proceeds |
1,00,000 |
(v) |
Loss on Sale of Asset |
25,000 |
Note: Depreciation for the period from Mar 31, 2008 to date of sale of asset Sep 30, 2008 has to be computed.
Amount of depreciation for the period from Apr 1, 2008 to Sep 30, 2008
i.e. for 6 months = Rs 2,00,000 × 15/100 × 6/12
= Rs 15,000
Stage III Passing of Journal entries in the books of X Ltd
Journal of X Ltd
Machinery Account
Depreciation Account
The depreciation is calculated on the reducing balance (Asset Cost Less Depreciation) and not on original cost. Under this method, a fixed rate (percentage) is applied to the original cost in the first year and to the book value in subsequent years. The book value of the asset means the balance of asset cost but not yet depreciated. The deprecation is deducted from the cost of the asset and the balance is termed as Written Down Value (WDV). In the next year, the fixed rate is applied to the WDV and not to the original cost. Under this method, the rate of deprecation remains the same but the amount of depreciation goes down decreasing.
The WDV at the end of the estimated useful life of the asset will equal the estimated salvage value.
R |
= |
|
R |
= |
Rate of depreciation in % |
N |
= |
Useful life of the asset |
S |
= |
Scrap value at the end of useful life of the asset |
C |
= |
Cost of the Asset. |
This method is suitable where
Points of Distinction | Straight Line Method (SLM) | Written Down Value Method (WDV) |
---|---|---|
1. Basis |
Depreciation is charged at a fixed rate on the original cost of the asset. |
Depreciation is charged at a fixed rate on original cost in the first year and on the WDV (Cost — Total Depreciation) in the subsequent years. |
2. Amount of Depreciation |
The amount of depreciation remains constant (same) throughout the life of asset. |
The amount of depreciation goes on decreasing from year to year. |
3. Effect on Net Profit |
Net Profit will be affected in later years since the maintenance charges may increase, depreciation being the same amount. |
Net Profit will not be affected in later years since the depreciation amount decreases. |
4. Formula and Calculation |
Easy to calculate depreciation as the formula is simple. |
Difficult to compute depreciation, as the formula requires mathematical skill |
5. Book Value |
At the end of useful life of the asset, book value is nil or equal to scrap value. |
The book value will never be zero or equal to scrap value. |
6. Suitability |
Suitable where (i) repair charges are less (i) obsolescence is less. |
Suitable where (i) repair charges are high (i) obsolescence is more frequent. |
7. Tax Authority’s Recognition |
This method is not recognised by Income Tax Authorities |
This method is recognised by Income Tax Authorities |
Illustration: 6
A machine was purchased on Apr 1, 2007 for Rs 50,000. The cost of installation and other expenses are Rs 3,000. Its scrap value at the end of its useful life will be Rs 5,000. Write up the Machine Account for the first two years under (i) WDV Method and (2) SLM charging 20% depreciation, assuming financial year is followed:
Solution
First, under SLM, amount of depreciation for a year (12 months) is calculated.
Annual Depreciation |
= |
Total Cost – Scrap value/Useful Life of Asset |
|
= |
Rs 50,000 + Rs 3,000 – Rs 5,000 |
|
= |
Rs 48,000 × 20/100 × 12/12 |
|
= |
Rs 9,600 |
Machinery Account (Under Straight Line Method)
Machinery Account (Diminishing Balance Method)
Now, the differences between these two methods can be easily understood.
The differences between these two methods can be illustrated in a better way as follows:
Illustration: 7
M/s Renu Sugars Ltd purchased a machine costing Rs 50,000 or Jan 1, 2004. The depreciation is to be charged @ 20% p.a. Write up the Machine Account for five years ending on Dec 31, 2008 under Straight Line Method and WDV Method:
Solution
Machine Account
Purchase of Assets (or Additions) and Depreciation
Illustration: 8
From the following information of Vas Ltd prepare Machinery Account for three years ending Mar 31, 2009, by providing depreciation @ 20% p.a. under Straight Line Method
Date | Transactions | Rs |
---|---|---|
Apr 1, 2006 |
Purchased a second hand machinery I |
1,20,000 |
Apr 1, 2006 |
Repairs on it |
30,000 |
Oct 1, 2006 |
Purchased a new machinery II |
3,00,000 |
Apr 1, 2007 |
Spent repairs on machine II |
3,000 |
Sep 30, 2008 |
Sold machinery I |
67,500 |
Sep 30, 2008 |
Purchased a new machinery III |
4,50,000 |
Solution
Step 1: Profit or Loss on Sale of Asset is calculated
|
|
Rs |
1. |
Total Cost of Asset (Rs 1,20,000 + Rs 30,000) |
1,50,000 |
2. |
Less: Depreciation on I from date of purchase to date of sale |
75,000 |
3. |
Book value as on date of sale (1–2) |
75,000 |
4. |
Less: Sale proceeds of Machine I |
67,500 |
5. |
Loss on sale (3–4) |
7,500 |
Step 2:
Machinery Account
Illustration: 9
From the following information of Ra & Co Ltd, prepare Machinery Account for three years ending Mar 31, 2009 by charging depreciation @ 20% p.a. applying WDV Method.
Date | Transactions | Rs |
---|---|---|
Apr 1, 2006 |
Purchased a second hand machinery I |
1,20,000 |
Apr 1, 2006 |
Spent for repairs |
30,000 |
Oct 1, 2006 |
Purchased a new machine II |
3,00,000 |
Apr 1, 2007 |
Spent for repairs on new machine II |
3,000 |
Sep 30, 2008 |
Sold machine I |
67,500 |
Sep 30, 2008 |
Purchased a new machine III |
4,50,000 |
Illustration figures are the same as that of the previous illustration but the Method of Deprecation differs here.
Solution
Step 1: Calculation of Profit/Loss on Sale of Machine:
Rs | ||
---|---|---|
1. |
Total Cost of Asset (Rs 1,20,000 + Rs 30,000) |
1,50,000 |
2. |
Less: Depreciation for 2006– 2007 (20% of Rs 1,50,000) |
30,000 |
3. |
Book value as on Apr 1, 2007 (1–2) |
1,20,000 |
4. |
Less: Depreciation for 2007–2008 (20% of Rs 1,20,000) |
24,000 |
5. |
Book value as on Apr 1, 2008 (3–4) |
96,000 |
6. |
Less: Depreciation upto date of sale from Apr 1, 2008 to Sep 30, 2008: 6 months 20% of Rs 96,000 for 6/12 |
9,600 |
7. |
Book value (6–7) as on Sep 30, 2008 |
86,400 |
8. |
Less: Sale proceeds |
67,500 |
9. |
Loss on Sale (7–8) |
18,900 |
Step 2:
Preparation of Machinery Account
Important Note: Amount spent on repairs on Apr 1, 2007 is of revenue nature and as such it is not debited to Machinery Account.
Note: There exists no difference in recording Journal entries under WDV. The procedure and accounting entries are similar to that of the procedure adopted under Straight Line Method.
Journal entries are same under both methods (i.e., Straight Line Method and Diminishing Value Method (WDV).
So this part is not repeated here.
Illustration: 10
On July 1, 2005, Shree Ltd purchased a second-hand machinery for Rs 40,000 and spent Rs 6,000 on re-conditioning and installing it. On Jan 1, 2006, the firm purchased machinery worth Rs 24,000. On June 30, 2007, (the machinery purchased on Jan 1, 2006) was sold for Rs 16,000. On July 1, 2007, another new machinery was purchased on installment basis, payment for which was to be made as follows:
June 30, 2008 |
Rs 10,000 |
July 1, 2008 |
Rs 12,000 |
June 30, 2009 |
Rs 11,000 |
Payments in 2008 and 2009 include interest of Rs 2,000 and Rs 1,000 respectively.
The company writes off depreciation @ 10% on original cost. The accounts are closed every year on Mar 31. Show the Machinery Account for three years ending Mar 31, 2008.
[B.Com (Hons) – Modified]
Solution
Note: As there is no specific instruction regarding the method of depreciation, Straight Line Method is followed.
Calculation of Depreciation: In order to avoid confusion, let the machinery purchased on July 1, 2005 be noted as Machine I (assumption), and the one purchased on Jan 1, 2006 as Machine II, and the other one purchased on July 1, 2007 as Machine III – for easy calculation of depreciation.
Step 1: For the year 2005–2006 (Apr 1, 2005 to Mar 31, 2006)
(i) Date of purchase July 1, 2005: Machine I |
Rs 40,000 |
Add: Expenses |
Rs 6,000 |
|
Rs 46,000 |
From July 1, 2005 to Mar 31, 2006: 9 months |
|
∴ Depreciation on Machine I = Rs 46,000 × 10/00 × 9/12 = Rs 3,450 |
|
|
|
(ii) Machine II was purchased on Jan 1, 2006 = Rs 24,000 |
|
From Jan 1, 2006 to Mar 31, 2006 = 3 months |
|
∴ Depreciation on Machine II = Rs 24,000 × 10/100 × 3/12 = Rs 600 |
Step 2: For the year 2006–2007 (From Apr 1, 2006 to Mar 31, 2007)
Note: There is no addition (purchase) or sale during this period. So depreciation has to be computed for 1 year for both the machines.
Rs 46,000 × 10/100 × 12/12 = Rs 4,600
Rs 24,000 × 10/100 × 12/12 = Rs 2,400
Step 3: For the year 2007–2008 (from Apr 1, 2007 to Mar 31, 2008)
This was sold on June 30, 2007
Depreciation for the period, i.e. from Apr 1, 2007 to June 30, 2007
∴ Depreciation = Rs 24,000 × 10/100 × 3/12 = Rs 600
(This means for a year.)
∴ Depreciation = Rs 46,000 × 10/100 × 12/12 = Rs 4,600
Depreciation for the period from July 1, 2007 to Mar 31, 2008
= Rs 33,000 × 10/100 × 9/12
= Rs 2,475
Step 4: Note: Interest is not to be added to the cost of asset for depreciation calculation. At this stage, profit or loss on sale of machinery has to be computed.
|
|
Rs |
1. |
Original cost (as on date of purchase Jan 1, 2006) |
24,000 |
2. |
Less: Depreciation for this (Machine II) |
3,600 |
3. |
Book value (1–2) as on date of sale (June 30, 2007) |
20,400 |
Less: Sale proceeds |
16,000 |
|
5. |
Loss (3–4) |
4,400 |
Hence, there is a loss of Rs 4,400 on the sale of Machine II.
Step 5: Now all these figures have to be transferred to “Machinery Account” which has to be prepared as follows:
Machinery Account
Important Note: Machine is brought under Hire-Purchases Scheme, payment by installment spreads over a number of years. But total cost (i.e., sum of all the installments) has to be taken into account for computing depreciation and at the same time excluding interest amount as already noted.
Illustration: 11
On Apr 1, 2006, Siva Ltd agreed to purchase a machine on hire-purchase basis from Dev Ltd. The cash price of the machine was Rs 6,00,000. The company was required to pay Rs 3,00,000 down and the balance in three annual installments of Rs 1,00,000 each plus interest @ 12% per annum. First installment was paid on Mar 31, 2007. Show Machine Account for all the three years in the books of Siva Ltd, which depreciated machine @ 15% per annum using Diminishing Balance Method. Assume the books of accounts are closed every year on Mar 31.
(C.S. Foundation – Modified)
Solution
Note: Asset is bought under hire purchase system and payment is made in installments. For calculating depreciation, installment is ignored and the total, i.e. cash price has to be taken into account. Interest need not be added to the cost of the asset.
Machinery Account
Illustration: 12
On Jan 1, 2005, a machine was purchased by Vasu Dev for Rs 60,000. On July 1, 2006 additions were made to the extent of Rs 12,000. On Apr 1, 2007, further additions were made to the extent of Rs 7,680. On June 30, 2008, a machine, the original value of which was Rs 9,600 on Jan 1, 2005, was sold for Rs 7,200. He closed books on Dec 31 every year.
Show the Machine Account for four years from 2005 to 2008 in the books of Vasu Dev, if depreciation is charged @ 10% under Original Cost Method.
B. Com (Hons) – Modified
Solution
Depreciation has to be calculated by Straight Line Method calculation.
Step 1: For the year 2005 (Jan 1, 2005 to Dec 31, 2005) that machine remains throughout the year
∴ Depreciation = Rs 60,000 × 10/100 × 12/12 = Rs 6,000
Step 2: For the year 2006: (From Jan 1, 2006 to Dec 31, 2006):
Before addition: |
Rs |
Depreciation = Rs 60,000 × 10/100 × 12/100 |
6,000 |
Addition on July 1, 2006 = (From July 1, 2006 to Dec 31, 2006) |
|
Depreciation = Rs 12,000 × 10/100 × 6/12 |
600 |
Total Depreciation for the year 2006 |
6,000 |
Step 3: For the year 2007:
|
Rs |
Before addition: (for 1 year) |
|
(i) Depreciation = Rs 60,000 × 10/100 × 12/12 |
6,000 |
(ii) Depreciation = Rs 12,000 × 10/100 × 12/12 |
1,200 |
Addition on Apr 1, 2007 (from Apr 1, 2007 to Dec 31, 2008) |
|
(iii) Depreciation = Rs 7,680 × 10/100 × 9/12 |
576 |
Total Depreciation for the year 2007 |
7,776 |
Step 4: For the year 2008:
(i) Sale on June 30, 2008 = (June 30, 2008 to Dec 31, 2008) |
Rs |
Rs 9,600 × 10/100 × 6/12 |
480 |
(ii) Balance (60,000 – 9,600) = 50,400 × 10/100 × 12/12 |
5,040 |
10% on Rs 12,000 machine for 1 year |
1,200 |
10% on Rs 7,680 machine for 1 year |
768 |
|
7,008 |
Step 5: Calculation of profit/loss on sale of machine:
|
|
Rs |
1. |
Cost of machine sold on June 30, 2008 |
9,600 |
2. |
Loss: Depreciation for 2005 |
960 |
3. |
Book value on Dec 31, 2005 |
8,640 |
4. |
Less: Depreciation for 2006 |
960 |
5. |
Book value on Dec 31, 2006 |
7,680 |
6. |
Less: Depreciation for 2007 |
960 |
7. |
Book value on Dec 31, 2007 |
6,720 |
8. |
Less: Depreciation upto June 30, 2008 only |
480 |
9. |
Book value on the date of sale |
6,240 |
10. |
Sale value on the date of sale |
7,200 |
11. |
Profit (10 – 9) (Rs 7,200 – Rs 6,240) |
960 |
Step 6: Preparation of Machinery Account:
Machinery Account
Under this method of recording depreciation, depreciation is to be credited to Provision for Depreciation Account.
As a result, the asset account is not affected by the amount of depreciation. The respective asset appears in the books (Ledger and Balance Sheet) at its original cost value. However, the amount in the credit side of the Provision for Depreciation Account shows the total amount of depreciation accumulated to date (till sold or discarded).
Journal entries to be passed are:
Depreciation A/c |
Dr. |
To Provision for Depreciation A/c |
|
Profit and Loss A/c
To Depreciation A/c
Asset Disposal A/c |
Dr. |
To Asset A/c |
|
on asset disposed off |
|
Provision for Depreciation A/c |
Dr. |
To Asset Disposal A/c |
|
Cash/Bank A/c |
Dr. |
To Asset Disposal A/c |
|
Asset Disposal A/c |
Dr. |
To Profit and Loss A/c |
|
Profit and Loss A/c |
Dr. |
To Asset Disposal A/c |
|
Illustration: 13
On Jan 1, 2006, Raj Ltd purchased a machinery for Rs 6,000,000. On July 1, 2008, a part of the machinery purchased on Jan 1, 2006 for Rs 40,000 was sold for Rs 22,500 and a new machinery at a cost of Rs 79,000 was purchased. The company has adopted the method of providing 1% p.a. depreciation on the original cost of the machinery. Prepare the necessary ledger accounts – Provision for Depreciation Account is maintained.
Solution
Step 1: Profit/loss on sale of machinery is to be calculated:
|
|
Rs |
1. |
Cost of Machinery (as on Jan 1, 2006) |
40,000 |
2. |
Less: Depreciation for the period from Jan 1, 2006 to July 1, 2008: 30 months Rs 40,000 × 10/100 × 30/12 |
10,000 |
3. |
Book value as on July 1, 2008 (1 – 2) |
30,000 |
4. |
Less: Sale proceeds |
22,500 |
5. | Loss on Sale (3 – 4) | 7,500 |
Step 2: Calculation of depreciation on machines (other than sold)
|
|
Rs |
1. |
On Machine I (Rs 6,00,000 – Rs 40,000) |
5,60,000 |
|
(Purchased) (Sold) |
|
|
Depreciation for 1 year: Rs 5,60,000 × 10/100 |
56,000 |
2. |
On new Machine II: |
|
|
Period from July 1, 2008 to Dec 31, 2008: 6 months |
|
|
Depreciation Rs 79,000 × 10/100 × 6/12 |
3,950 |
|
Total (for 2008) |
59,950 |
Step 3
Machinery Account
Step 4
Provision for Depreciation Account
Step 5
Machinery Disposal Account
Accounting Standard–6 of ICAI stipulates that the depreciation method selected should be applied consistently. It has to facilitate easy comparison of results of operation from period to period. AS–6 (Revised) permits change of method only from the back date (retrospectively) on existing machines.
In order to comply with any statutory requirements or Accounting Standards of ICAI, change from one method of depreciation to another method can be adopted.
In case, a change in the method of depreciation is needed, depreciation must be “Recalculated” from the date of asset coming into use.
Due to recalculation, Surplus (Excess) or Deficiency (Shortage) may be the outcome. Surplus is to be credited to Profit and Loss A/c (or Depreciation A/c) and Deficiency is to be debited to Profit and Loss A/c (or Depreciation).
This can be explained with the help of the following illustration.
Illustration: 14
On Jan 1, 2005 X Ltd purchased machinery costing Rs 75,000 and provided depreciation @ 10% p.a. on Straight Line Method basis. At the end of 2009, the company decided to change the method of depreciation from Straight Line Method to Diminishing Value Method, retrospectively, the rate of depreciation remains unchanged. Prepare the Machinery Account upto the year 2008.
Solution
Step 1: |
Calculation of total depreciation under old method: |
|
|
Period from Jan 1, 2005 to Dec 31, 2008: 36 months (3 years) |
Rs |
|
Depreciation = Rs 75,000 × 10/100 × 36/12 |
22,500 |
|
*1. Total depreciation under Straight Line Method |
18,000 |
Step 2: Calculation of total depreciation under new method:
|
(Diminishing Value Method) |
|
1. |
Cost of Machinery as on Jan 1, 2005 |
75,000 |
2. |
Less: Depreciation for 1 year (2005) |
7,500 |
|
(Rs 75,000 × 10/100 × 12/12) |
67,500 |
3. |
Book value on Jan 1, 2006 |
|
4. |
Less: Depreciation for 1 year (2006) |
|
|
(Rs 67,500 × 10/100 × 12/12) |
6,750 |
5. |
Book value on Jan 1, 2007 |
60,750 |
6. |
Less: Depreciation for 1 year (2007) |
|
|
(Rs 60,750 × 10/100 × 12/12) |
6,075 |
7. |
Book value on Jan 1, 2008 |
54,675 |
|
*2. Total depreciation under new method |
|
|
(Rs 7,500 + Rs 6,750 + Rs 6,075 |
20,325 |
Step 3: Calculation of the difference between the total depreciation under old method (Straight Line Method) and the total depreciation under new method (Diminishing Value Method).
|
|
Rs |
*1. |
Total Depreciation under SLM (Old Method) (refer Step 1) |
22,500 |
*2. |
Total Depreciation under WDV (New Method) (refer Step 2) |
20,325 |
3. |
Difference (Surplus or Excess) |
2,175 |
Step 4: Pass Journal entries.
|
Machinery A/c |
Dr. 2,175 |
|
|
To Profit and Loss A/c |
|
2,175 |
|
(Being the excess on the method of depreciation credited to Profit and Loss A/c) |
Step 5: Depreciation for the current accounting year
|
Rs 54,675 × 10/100 × 12/12 |
|
|
Book Value on Jan 1, 2008 |
|
|
(refer Step 2) |
Rs 5,468 |
|
(rounded off to the nearest rupee) |
|
Step 6: Preparation of Machinery Account:
Machinery Account
Illustration: 15
Shree Ltd purchased on Jan 1, 2004, certain machinery for Rs 97,000 and spent Rs 3,000 on its execution. On July 1, 2004 additional machinery costing Rs 50,000 was purchased. On July 1, 2006, the machinery purchased on Jan 1, 2004 was auctioned for Rs 50,000 and on the same date a new machinery was purchased at a cost of Rs 75,000. Depreciation was provided annually on Dec 31 @ 10% p.a. on the original cost. No depreciation need be charged during the year of sale of machinery for that part of the year when the machine was used. In 2008, however, the company has changed the method of depreciation to WDV Method @ 15% p.a. from the Straight Line Method. Show the machinery account for the period from 2004 to 2008.
[B.com (Hons) – Modified]
Solution
Let the machine purchased on Jan 1, 2004 be called as Machine I, additional machinery on July 1, 2004 be Machine II and the new machinery purchased on July 1, 2006 be Machine III for computing depreciation without any confusion.
Step 1: Calculation of total depreciation for Machine II, under both the methods worked out as:
Machine II | Straight Line Method Rs (10%) |
Written Down Method Rs (15%) |
|
---|---|---|---|
|
Cost as on July 1, 2004 |
50,000 |
50,000 |
|
(Addition) |
|
|
Less: |
Depreciation for the period |
|
|
|
From July 1, 2004 to Dec 31, 2004 |
2,500 |
3,750 |
|
for six months: (year 2004) |
|
|
|
Book value on Dec 31, 2004 |
47,500 |
46,250 |
Less: |
Depreciation for 1 year (2005) |
5,000 |
6,938 |
|
Book value on Dec 31, 2005 |
42,500 |
39,312 |
Less: |
Depreciation for 1 year (2006) |
5,000 |
5,897 |
|
Book value on Dec 31, 2006 |
37,500 |
33,415 |
Less: |
Depreciation for 1 year (2007) |
5,000 |
5,012 |
|
Book value on Dec 31, 2007 |
32,500 |
28,403 |
|
Total Depreciation |
17,500 |
21,597 |
Machine III | Straight Line Method Rs (10%) |
Written Down Method Rs (15%) |
|
---|---|---|---|
|
Cost (as on July 1, 2006) |
75,000 |
75,000 |
Less: |
Depreciation from July 1, 2006 to |
|
|
|
Dec 31, 2006: 6 months |
3,750 |
5,625 |
|
Book value on Dec 31, 2006 |
71,250 |
69,375 |
Less: |
Depreciation for 1 year (2007) |
7,500 |
10,406 |
|
Book value on Dec 31, 2007 |
63,750 |
58,969 |
|
Total Depreciation |
11,250 |
16,031 |
Step3: Computation of Surplus or Deficiency:
|
Total depreciation on Machine II and III: |
Rs |
(i) |
Under WDV Method |
|
|
(Rs 21,597 + Rs 16,031) |
37,628 |
(ii) |
Under Straight Line Method |
|
|
(Rs 17,500 + Rs 11,250) |
28,750 |
|
Difference between (i) and (ii) (Excess) |
8,878 |
Step4: Computation of Depreciation for 2008
|
Book value of both machines (II and III) |
|
|
(WDV: Ref Step 2) |
96,250 |
|
(Rs 63,750 + Rs 32,500) |
|
Less: |
Difference (Excess) |
8,878 |
|
|
87,372 |
Less: |
15% Depreciation |
13,106 |
|
(under WDV) |
74,266 |
Machinery Account
As per AS–6, the change in the method of depreciation must be effective with retrospective effect on the existing machine. The position will be as:
* Calculation of loss on sale: |
Rs |
||
|
Cost |
= |
1,00,000 |
Less: |
Depreciation |
= |
20,000 |
|
|
|
80,000 |
Less: |
Sale proceeds |
= |
50,000 |
|
Loss |
= |
30,000 |
Illustration: 16
X Ltd bought a truck on Jan 1, 2005 for Rs 1,20,000 and a sum of Rs 40,000 was spent for various accessories on July 1, 2006 another vehicle was purchased for Rs 1,04,000. On July 1, 2007, the first truck was sold for Rs 1,20,000. On the same date another truck was purchased for Rs 1,00,000. On July 1, 2008 the second vehicle was sold for Rs 92,000. Rate of depreciation was 10% p.a. on the original cost annually on Dec 31. In 2007, the method of depreciation was changed to Diminishing Value Method, on the balance existing on Dec 31, 2007, the rate being 15% p.a. Prepare Truck Account for 2005, 2006, 2007 and 2008.
B.Com (Hons.) – Modified
Solution
Step 1: Accounting Standard–6, stipulates that change in method and rate should take place with retrospective effect.
But in this problem, instructions are given accordingly the change in method and rate will have to take place from Dec 31, 2007.
Step 2: Calculation of depreciation for 2005:
Cost as on Jan 1, 2005 (Rs 1,20,000 + Rs 40,000) = Rs 1,60,000
Period: (from Jan 1, 2005 to Dec 31, 2005): 1 year
Depreciation for 2005 = Rs 1,60,000 × 10/100 × 1 = Rs 16,000
Step 3: Calculation of depreciation for 2006:
Depreciation for Truck I for 2006 = Rs 16,000
Period (from July 1, 2006 to Dec 31, 2006) = 6 months
Depreciation for Truck II for 2006 = Rs 5,200
(Rs 1,04,000 × 10/100 × 6/12)
Step 4: Calculation of depreciation for 2007
Note:
Book Value as on Jan 1, 2007 = Rs 98,800
(Rs 1,04,000 – Rs 5,200)
↓
(Depreciation for 2006)
Period: from Jan 1, 2007 to Dec 31, 2007 = 1 year
Depreciation for 2007 = Rs 14,820
(Rs 98,800 × 15/100 × 12/12)
Cost as on July 1, 2007: Rs 1,00,000
Period from July 1, 2007 to Dec 31, 2007: ½ year
Depreciation for 2007 = Rs 7,500
(Rs 1,00,000 × 15/100 × ½)
Step 5: Depreciation for the year 2008:
Book value on Jan 1, 2007: Rs 98,800
Less: Depreciation for 2007: Rs 14,820
Book value on Jan 1, 2008: Rs 83,980
Depreciation (Jan 1, 2008 to July 1, 2008) = Rs 83,980 × 15/100 × 6/2 = Rs 6,299
Rs | ||
---|---|---|
1. |
Depreciated value of Truck II date of sale (July 1, 2008) |
77,681 |
(Rs 83,980–Rs 6,299) |
||
2. |
Sale proceeds |
92,000 |
Profit (Rs 92,000–Rs 77, 681) |
14,319 |
|
(2–1) |
Book value cost as on July 1, 2007 |
1,00,000 |
Period from July 1, 2008 to Dec 31, 2007 = 6/12 years |
|
Depreciation 1,00,000 × 15/100 × 6/12 (2007) |
7,500 |
Book value as on Jan 1, 2008 |
92,500 |
Less: Depreciation @ 15% for 1 year (for 2008) |
13,875 |
Book value as on Jan 1, 2009 |
78,625 |
Step 6
Truck Account
Illustration: 17
On Apr 1, 2004, a new plant was purchased for Rs 40,000 and a further sum of Rs 2,000 was spent on its installation. On Oct 1, 2006 another plant was acquired for Rs 25,000. Due to fire on Jan 5, 2007 the first plant was totally destroyed and was sold for Rs 1,000 only. On Jan 20, 2008 a second hand plant was purchased for Rs 30,000 and a further sum of Rs 5,000 was spent for bringing the same to use on Mar 15, 2008. Depreciation has been provided @ 10% p.a. on straight line basis. It was a practice to provide depreciation for full year on all acquisitions made at any time during any year and to ignore depreciation on any item sold or disposed of during the year. None of the assets were measured. The accounts are closed annually to Mar 31. It is now decided to follow the rate at 20% p.a. on Diminishing Balance Method with retrospective effect in respect of the existing items of plant and to make necessary adjustment entry on Apr 1, 2008.
You are required to prepare
B.Com (Hons.) – Modified
Solution
Here, all accounts, i.e. Provision for Depreciation, Sale of Asset and change in method with retrospective effect from part of the problem and one by one is to be prepared as follows:
Step 1: Preparation of Provision for Depreciation Account:
Provision for Depreciation Account
Step 2: Calculation of Depreciation under Diminishing Value Method
|
|
Rs |
1. |
Plant purchased on Oct 1, 2006 cost |
25,000 |
|
Less: Depreciation for (2006–2007): 1 year |
5,000 |
|
(Rs 25,000 × 20/100 × 1) |
|
|
Book value |
20,000 |
|
Less: Depreciation for (2007–2008): 1 year |
4,000 |
|
(Rs 20,000 × 20/100 × 1) |
______ |
|
Total Depreciation for this plant = Rs 5,000 + Rs 4,000 = Rs 9,000 |
|
2. |
Plant purchased (Jan 20, 2008) |
|
|
Cost |
35,000 |
|
(Rs 30,000 + Rs 5,000) |
|
|
Less: Depreciation for 2007 – 08 |
7,000 |
|
(Rs 35,000 × Rs 20/100 × 1) |
______ |
|
Depreciation for this second-hand plant |
7,000 |
|
Total provision for depreciation for both plants |
16,000 |
|
*Provision already made (SLM) |
8,500 |
|
Difference: Provision – Additional Depreciation Needed |
_____ |
Step 3
Plant Account
Illustration: 18
Machinery Account of Parul Ltd showed a debit balance of Rs 97,200 on Jan 1, 2006, depreciation @ 10% p.a. is charged. On July 1, 2006, a part of the machinery purchased for Rs 30,000 on Jan 1, 2004, was sold for Rs 21,000 and on the same date a new machinery was purchased for Rs 60,000. On Dec 31, 2006, the company decided to change the method of depreciation from WDV Method to Straight Line Method with effect from Jan 1, 2004, depreciation remaining at 10% p.a.
Prepare necessary ledger accounts.
Solution
In case, sale or disposal of a part of the asset occurs, new account – Asset Disposal Account may be prepared. As such, book value of the sold or discarded asset may be transferred to Asset Disposal Account.
Step 1: As debit balance of Machinery Account is given in the question, cost price on that date has to be computed as:
|
|
Rs |
Let the original cost on Jan 1, 2004 be taken as |
100 |
|
Then, |
Less: Depreciation @ 10% for 2004 |
10 |
|
WDV on Jan 1, 2005 will be |
90 |
|
Less: Depreciation @ 10% for 2005 |
9 |
|
WDV on Jan 1, 2006 |
81 |
If WDV is Rs 81, original cost will be Rs 100. |
|
|
[Original cost for Rs 97,200 = 100/81 × Rs 97,200 |
|
|
|
= Rs 1,20,000 |
1,20,000 |
|
Rs |
Step 2: Less: Machinery sold on July 1, 2006 |
30,000 |
(cost as on July 1, 2004) |
|
Cost of machinery in hand |
90,000 |
(on July 1, 2004) |
|
Add: Cost of machinery purchased |
60,000 |
(on July 1, 2006) |
|
Acquisition cost of machinery still in hand |
_______ |
Step 3: Depreciation on machinery at SLM for |
|
2004 and 2005 @ 10% on Rs 90,000 |
18,000 |
(Rs 9000 + Rs 9000) |
|
Less: Depreciation already charged @ 10% |
|
on WDV on Rs 90,000 for 2004 = Rs 9,000 |
|
and on Rs 81,000 for 2005 = Rs 8,100 |
17,100 |
(Rs 9,000 + Rs 8,100) |
|
Difference due to change in method |
___ |
Step 4: Calculation of WDV of machinery to be transferred to new account – Machinery Disposal Account:
|
|
|
Rs |
Original Cost |
30,000 |
||
|
Less: |
Depreciation for 2004 |
3,000 |
|
|
|
27,000 |
|
Less: |
Depreciation for 2005 |
2,700 |
|
|
|
______ |
|
Less: |
Depreciation upto July 1, 2006 for 6 months |
1,215 |
|
|
|
______ |
Step 5
Machinery Account
Note: No specific instructions are given in the question. Accordingly, change in method of depreciation is applicable at the end of accounting period, i.e. for the year 2006 only.
Step 6
Machinery Disposal Account
Asset Account Dr.
To Interest A/c
This can be best explained by way of an illustration as follows:
Illustration: 19
X takes a lease of land for Rs 1,00,000. The annual depreciation is charged on the basis of Annuity Method presuming the rate of interest at 6% p.a. The annuity table shows that the annual amount necessary to write off Re 1 in 4 years at 6% p.a. is Rs 288591. Prepare the Lease Account.
Solution
To write off Re 1 together with interest at 6% over 4 years = Re .288591
the annual charge (This is shown in the question itself.
Annuity Table shows all data.)
To write off Rs 1,00,000 plus interest, the annual charge = Rs 1,00,000 × .288591
Now, a table is to be prepared to show the amounts of interest and depreciation to be charged to Income Statement or Profit and Loss Account.
Table showing the amounts of interest and depreciation to be charged to Income Statement and Profit and Loss Account.
Lease Account
Such amount which has to be set aside every year by way of depreciation is calculated by using Sinking Fund tables.
Suitable for concerns which aim to treasure some part of amount for futuristic activities:
Basis of Difference | Annuity Method | Sinking Fund Method |
---|---|---|
1. Separate Fund Account |
Annual amount is not set aside as a separate fund account |
Annual amount is set aside as a separate fund account |
2. Charge of interest |
Interest is charged from the end of first year itself |
Interest is charged only at the end of second year |
3. End result |
The total depreciation is more than the depreciation cost of the asset (as interest is added to the cost of the asset) |
The total depreciation is less than the depreciable cost of the asset (as interest is deducted from the cost of the asset) |
4. Outside investment |
Funds are not invested in outside securities |
Funds set aside are invested in outside securities |
5. Realization of interest |
Interest is not actually realized |
Interest is actually realized, as it is received from investment in outside securities. |
6. Accounting treatment |
Interest is credited to Profit and Loss A/c by debiting to Asset account |
Interest is credited to Sinking Fund Account |
7. Effect on Profit and Loss Account |
As depreciation is fixed, interest is decreasing – effect on Profit and Loss A/c will result in a rise |
As depreciation and interest being uniform, there will be one effect on Profit and Loss Account |
Stage I: |
At the end of First Year |
|
Step 1: |
(a) Find the amount of depreciation to be provided from the Sinking Fund tables. That has to be recorded at the end of the first accounting period as: |
|
|
Depreciation A/c |
Dr. |
|
To Sinking (Depreciation Account) |
|
Step 2: |
(b) The amount so transferred to Depreciation Fund is invested in outside securities (purchasing instruments) |
|
|
Depreciation (Sinking)Funds Investment Account |
Dr. |
|
To Bank A/c |
|
Stage II: |
At the end of second year and subsequent years (except last year) |
|
Step 1: |
(a) When interest is received on investments |
|
|
Bank A/c |
Dr. |
|
To Depreciation Fund A/c |
|
Step 2: |
(b) On setting aside the annual amount: |
|
|
(same as in stage 1 (a)) |
|
|
Depreciation A/c |
Dr. |
|
To Depreciation Fund A/c |
|
Step 3: |
(c) On investing the amount set aside (with interest) |
|
|
(same as in Stage 1 (b)) |
|
|
Depreciation Fund Investment A/c |
Dr. |
|
To Bank A/c |
|
(Note: Here the amount to be invested = Amount set aside + Amount of interest received on previous investments) |
||
Stage III: |
Last Year |
|
Step 1: |
(a) On sale of investments (realization of investment fund) |
|
|
Bank A/c |
Dr. |
|
To Depreciation Fund Investments A/c |
|
Step 2: |
(b) For transfer of profit/loss on realization of depreciation fund investments: |
|
|
(i) When Profit: |
|
|
Depreciation Fund Investment A/c |
Dr. |
|
To Depreciation Fund A/c |
|
|
(ii) When Loss: |
|
|
Depreciation Fund A/c |
Dr. |
|
To Depreciation Fund Investments A/c |
|
Step 3: |
(c) For sale of old asset (scrap) |
|
|
Bank A/c |
Dr. |
|
To asset A/c |
|
Stage V: Treatment in Balance Sheet
Illustration: 20
A machine costing Rs 10,00,000 is expected to have an estimated useful life of 4 years and scrap value of Rs 71,800 at the end of useful life. The Sinking Fund table shows that Re 0.215470803 invested at the end of each year at 10% compound interest will amount to Re.1 at the end of 4 years and Re.1 p.a. at 10% compound interest amount to Rs 4.641 in 4 years.
Calculate the amount of depreciation to be provided for.
Solution
Method I
Step 1:Cost of Machine – Scrap Value
Rs 10,00,000 – Rs 71,800
= Rs 9,28,200
Step 2: Rs 9,28,000 × 0.215470803
= Rs 1,99,999.9965
= Rs 2,00,000
Method II
Step 1: Cost – Scrap
Rs 10,00,000 – Rs 71,800
= Rs 9,28,200
Step 2: Rs 9,28,200 ÷ 4.641
= Rs 2,00,000
Case (a): When specific investments are to be made in multiples of same specific denomination (e.g. Rs 10; Rs 20 and so on) (will be given in the problem), then only that amount which is fully divisible by the given denomination will be invested.
Example: Suppose the amount available for investment is Rs 1,05,129.08 and the investments are to be made in the multiple of Rs 10, then only Rs 1,05,120 will be invested and the balance Rs 9.08 will be kept separately in Depreciation Fund Cash A/c. This will be adjusted at the end of the time of making investments during the next accounting period.
Case (b): When no specific instruction is given:
Case (c): In any case, no investment should be made in the last year.
Calculation of the amount of interest on depreciation fund investments:
Illustration: 21
From the following particulars calculate the amount of investments to be made and interest to be received by assuming investments are to be equal to entire profits set aside.
Profit to be set aside |
= Rs 60,000 |
Interest Rate |
= 10% |
Year of Realization of Investments |
= 4th year. |
Solution
Note: Entire profit is to be set aside. No specific instruction is given, i.e. amount available is to be made in multiple of specific amount. So, the entire amount is to be taken into account.
This can be best shown in the following table:
Table showing the calculation of the amount of investment to be made and interest to be received:
Note
Illustration: 22
From the following figures calculate the amount of investment to be made and interest to be received (by considering investments to be made in the nearest multiple of Rs 100)
Profit to be set aside |
= Rs 41,602.89 |
Interest Rate |
= 10% |
Year of Realization of Investments |
= 4th year. |
Solution
Draw the columns as in previous illustration:
Note: In the illustration, investments are to be made in the nearest multiple of Rs 100, investment amount is worked out in multiples of 100 and the fraction is left out. Take the case if in II year – Profit to be set aside + Interest = Rs 41,602.89 + Rs 4,160 = Rs 45762.89. This is to be divided by 100:45,762.89/100.
(Rs 45,700 in full, i.e. multiple of 100 – 457 × 100) the fraction of Rs 62.89 is to be kept separately in Depreciation Fund Cash A/c and not to be shown in the account.
This is the difference to be noted by students.
Illustration: 23
Vasant bought a machine on Apr 1, 2003 for a sum of Rs 2,00,000 having useful life of five years. It is estimated that the plant will have a scrap value of Rs 32,000. He decided to charge depreciation according to Depreciation Fund Method. Sinking Fund Table shows that Re. 0.180975, if invested yearly @ 5% p.a. produces Re. 1 at the end of five years. The depreciation fund investments are expected to earn interest @ 5% p.a. At the end of fifth year, the investments were sold for Rs 1,30,000 and the scrap realized Rs 34,000.
You are required to prepare Plant Account. Depreciation Fund Account and Depreciation Fund Investments Account for five year period.
B.Com (Hons) – Modified.
Solution
Step 1: Calculation of amount to be provided for depreciation fund every year:
(Remember Method I in Illustration 20)
Cost – Scrap |
= |
Rs 2,00,000 − Rs 32,000 |
|
= |
Rs 1,68,000 |
Multiply this by the figure from Sinking Fund Table |
||
|
= |
(Rs 1,68,000) × 0.180975 |
|
= |
Rs 30,403.60 |
|
= |
Rs 30,404 (rounded off) |
|
|
Step 2: Calculation of the amount of investments to be made and interest to be received for 5 years. Table showing investments to be made each year and interest to be received.
Step 3: Preparation of Depreciation Fund Account:
Depreciation Fund A/C
*To be transferred from Depreciation Fund Investment A/c.
**Plant A/c may be transferred from Plant A/c but it may be calculated simply: (Rs 2,00,000 (Cost) – Rs 34,000 (Scrap)) = Rs 1,66,000
Note: Interest is transferred from table column 3.
Step 4: Preparation of Depreciation Fund Investment A/c
Depreciation Fund Investment Account
Note: (1) Bank A/c → represents two components:
To enter the figure for the years from 2005 to 2007, refer to the table Step 2 and directly transfer the figure under column “Investments to be made”.
Column 5: Students need not work out again thereby saving time.
(2) Bank A/c → For the year – (on credit side) 2008 represents the value of investments sold at the end of 5th year.
Step 5: Preparation of Plant Account
Plant Account
Step 6: Preparation of Depreciation Account
Depreciation Account
The depreciation is computed as follows:
Depreciable cost of an asset is Rs 1,00,000; useful life of that asset is 4 years. Calculate amount of depreciation to be provided for the period.
Solution
Useful Life of the Asset = 4 years
Sum-of-the-Years’-Digit = 1 + 2 + 3 + 4 = 10
I year = Depreciation = 4/10 × 1,00,000 = Rs 40,000
II year = Depreciation = 3/10 × 1,00,000 = Rs 30,000
III year = Depreciation = 2/10 × 1,00,000 = Rs 20,000
IV year = Depreciation = 1/10 × 1,00,000 = Rs 10,000
Under this method, more amount is charged in the I year, i.e. Rs 40,000 and less towards the end, i.e. Rs 10,000.
Depreciation expenses differ from method to method. Choice of selecting a suitable depreciation method is not easy. The decision is based on the inherent characteristic features of an asset.
Accelerated depreciation methods may be of much use in case of the following:
So, all these factors, characteristic features of assets, maintenance costs of assets, wear and tear of equipment and machinery, renewal cost of equipment, expected useful life of the assets, allocation of cost (matching principles of cost and revenue), net book value of assets, accountant’s role and management Policy have to be analyzed to choose the method of depreciation, which indeed is an uphill task.
The notion that depreciation is a source of fund or working capital is a misconception which leads to a big controversy
Generally, funds are generated by revenues from sales. But depreciation is a non-cash expense. Depreciation does not require the use of funds or working capital. So, the view that depreciation is a source of funds is erroneous.
Journal entry to record depreciation:
Depreciation Expense A/c Dr.
To Accumulated Depreciation A/c
Hence, the debit account is an expense account and the credit account is contra fixed account, according to accounting principles. It is crystal clear from this that depreciation is a source of expense and not a source of fund.
But viewed from other angle, depreciation is considered to be a source of fund, when funds from operations are calculated. In such situation, depreciation is added which tempts to treat it as a source of fund. But a careful analysis will reveal that the funds provided by operations will remain unaffected by the charge on depreciation.
It may by concluded that this conception is only a misconception. As per accounting principles, under no circumstances depreciation is a source of fund or working capital.
The term “Provision” refers to
A provision may be
It should be noted here that if a liability is determined in specific value and in advance, then for such known liability, provision need not be created; instead that particular liability can be created, e.g. Liability for Salary.
Main object of creating a provision is to make good the loss in the value of assets or losses or expenses, the amount of which cannot be determined with considerable accuracy.
Provision is a charge against the Profits.
It is created by debiting the Profit and Loss Account.
It may be disclosed in any one of the following ways:
The term “Reserves” generally refers to profits retained in the business not having any of the characters of a provision.
Any sum appropriated or set aside out of the profit of a business not intended to cover up any liability, loss or reduction in valuation of assets may be referred to as “Reserve”.
Reserve also means accumulated or undistributed profits.
Basis of Distinction | Provision | Reserve |
---|---|---|
1. Main objective |
It is created for a specific purpose and should be used only for that specific purpose |
It is not created for a specific purpose and may be general in nature |
2. Effect on profit |
It reduces net profits |
It reduces only divisible profits |
3. Dividend distribution |
It cannot be utilized for distribution of dividends |
Unutilized reserves can be utilized for distribution of dividends |
4. Legality |
It is created to meet legal requirements |
In this case, there are no legal requirements needed |
5. Vice versa transfer |
It cannot be transferred to General Reserve |
It can be transferred to Provisions |
6. Charge vs. appropriation |
It is a charge to Profit and Loss Account. It can be created even if there are no profits |
It is an appropriation of profit and can be created only when there is sufficient profits |
7. Nature of investment |
It is never invested outside the business |
It can be invested outside the business |
8. Disclosure in Profit and Loss A/c |
It is shown on the Debit side of Profit and Loss A/c |
It is shown on the Debit side of Profit and Loss Appropriation A/c |
9. Balance Sheet |
It is shown by deducting from the respective item |
It is shown under the head “Reserves and Surplus” on the Liabilities side of Balance Sheet |
Reserves may be classified into Capital Reserve and Revenue Reserve.
Any reserve which is created out of capital and is not to be utilized for distribution of profit (among the owners of the business by way of drawings, dividends, etc) is referred to as Capital Reserve.
Examples: Provision on the issue of shares and debentures, profit on issue of forfeited shares, profit on sale of a business or a part of business, any profit on sale of fixed assets and so on.
Any reserve which is available for distribution of profit among the owners of business entities is referred to as Revenue Reserve.
Example: General Reserve, Debenture redemption reserve, Investment fluctuation reserve, staff welfare reserve and so on.
The Revenue reserve may further be classified into (1) General Reserve and (2) Specific Reserve.
The name itself leads to a concept that this type of reserve is not to be created for any specific purpose. It means that this reserve is to be created for any general purpose of the concern.
The specific reserves are to be created for a specific purpose only. It can be utilized for that specific purpose only.
Type of Distinction | Capital Reserve | Revenue Reserve |
---|---|---|
Type of transaction |
It may be due to internal transaction or external transaction |
It may always be formed due to internal transaction only |
Distribution of profit |
It is not utilized for distribution of profit |
It is utilized for distribution of profit |
Creation |
It is not created by appropriation of profit |
It is always created by retaining profit |
Pre-incorporation period |
It may be created from pre incorporation profit |
It is never created from pre-incorporation period |
Nature |
It is always specific |
It is general or specific |
Any business entity will be in dire need of a certain amount to meet out repairs and maintenance for the fixed assets. It is normal in any business concern, the amount needed will be less in the initial years, but will be heavy at the end of useful life of fixed assets. In order to ensure a uniform charge for such purpose, many concerns create a reserve known as Provision for Repairs and Renewals.
Entry: Profit and Loss Account Dr.
To Provision for Repairs and Renewable Account
To Repairs and Renewable A/c
Illustration 24
Raj has created a repairs and renewal provision on Mar 31, 2006 by charging Rs 6,000 each year. During the three years ended Mar 31, 2007, 2008 and 2009, actual repairs amounted to Rs 4,956, Rs 5,310 and Rs 6,006, respectively. Show repairs and renewals account for three year period.
B.Com (Hons) – Modified.
Solution
Repairs and Renewals Account
The Institute of Chartered Accountants of India, keeping in view with international accounting principles, revised (AS)–6.
This standard AS–6 deals with the concept: Depreciation
Depreciation is defined as “a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the Expected Useful Life of the Asset. Depreciation includes amortization of assets whose useful life is predetermined”.
1. Accounting for Depreciation:
Then, depreciation is to be determined independently on the basis of an estimate of its own useful life.
In other cases, the depreciation has to be determined on the basis of remaining useful life of the existing asset plus addition or extension as an integral part.
For depreciable assets having no material value, depreciation is to be allocated fully in the accounting period in which the said asset is acquired.
When such a change in method of depreciation occurs, depreciation should be calculated in accordance with new method with retrospective effect
The deficiency surplus arising from such retrospective computation should be adjusted into the Profit and Loss Account of the year in which depreciation is changed.
This fact must be disclosed as a change in accounting policy.
Amortization: The gradual and systematic writing off of an asset or an account over a reasonable period is referred to as “Amortization.”
Annuity: A series of periodic cash flows may be called so. Annuity method takes care of the interest on investments and added to the cost of the asset to compute depreciation.
Depreciation: A measure of the wearing out or loss of value of a depreciable asset arising from use, efflux of time or obsolescence.
Obsolescence: The reduction of utility of an asset that results from the development of a better machine or process.
Provision: An amount written off or retained or earmarked for diminution in value of assets is known as Provision. It may also be retained for any known liability.
Reserve: Accumulated profit of a business. Reserve is an appropriation of profits.
Sinking Fund: A required annual payment that allows for the periodic retirement of debt.
Straight Line Method: It is a method of computing depreciation. It allocates uniform amount of depreciation amount to each full accounting period of an asset’s useful life.
WDV Method: It is another depreciation method according to which the depreciation charge is a certain percentage of the WDV of assets.
M.C. Shukla, T.S. Grewal and S.C. Gupta, Advanced Accountancy, Chand and Company, 2008 Edition.
J.R. Monga, Financial Accounting – Concepts and Applications, Mayor Paper Back, New Delhi, 2007– 08.
P.C. Tulsian, Financial Accounting, Pearson Education, New Delhi, 2004.
I State whether the following statements are True or False
Answers
1. True |
2. False |
3. False |
4. True |
5. True |
6. False |
7. True |
8. False |
9. True |
10. False |
11. False |
12. False |
13. True |
14. False |
15. True |
16. False |
17. True |
18. False |
19. True |
20. False |
21. True |
22. True |
23. False |
24. False |
25. True |
II Fill in the blanks with suitable words
Answers
1.Model: Computation of depreciation under Straight Line Method.
Calculate the Rate of Depreciation under SLM.
Answer: (i) 15%, (ii) 9%, (iii) 8% and (iv) 18%
2. Model: Calculation of amount of depreciation under SLM.
A machine was purchased for Rs 96,000. Expenses incurred on its cartage and installation Rs 24,000. The residual value at the end of its Expected Useful Life of 4 years is estimated at Rs 48,000. Calculate the amount of depreciation for the first year ending on Mar 31, 2009 if the machine was purchased on (i) Apr 1, 2008, (ii) July 1, 2008, (iii) Oct 1, 2008 and (iv) Jan 1, 2009.
Answer: (i) Rs 18,000, (ii) Rs 13,500, (iii) Rs 9,000 and (iv) Rs 4,500
3. Model: Calculation of profit/loss on sale of asset under SLM.
ABC Ltd purchased a second-hand machine for Rs 1,50,000 and spent Rs 30,000 on its repairs. Depreciation is to be provided @ 10% p.a. according to Straight Line Method. This machine was sold for Rs 1,35,000. Accounting year is financial year. Calculate the profit or loss on sale of machine in each of the following alternative cases:
Answer: (i) Profit Rs 9,000, (ii) NIL, (iii) Profit Rs 4,500 and (iv) Loss Rs 4,500
4. Model: Preparation of Asset Account under SLM
On Jan 1, a public limited company purchased a second-hand machine for Rs 3,12,000 and spent Rs 12,000 as shipping and forwarding charges; Rs 30,000 as import duty; Rs 3,000 as carriage inwards; Rs 12,000 as repair charges; Rs 3,000 as installation charges; Rs 2,400 as brokerage of middleman and Rs 600 for an iron pad. It is estimated that the machine will have a scrap value of Rs 12,000 at the end of its useful life which is 20 years. On Sep 30, 2006, amount spent on repairs Rs 12,000; on July 1, 2009 this machine was sold for Rs 1,89,600. You are required to prepare the Machinery Account for the first three calendar years.
Answer: Loss on sale: Rs 1,43,400
5. A cabs company purchased 5 tempos at Rs 2,00,000 each on Apr 1, 2007. The company writes off depreciation @ 20% p.a. on original cost and observes calendar year as its accounting year. On Oct 1, 2009 one of the tempos was involved in an accident and is completely destroyed. Insurance company paid Rs 90,000 in full settlement of the claim. On the same day, the company purchased a used tempo for Rs 1,00,000 and spent Rs 20,000 on its overhauling
You are required to prepare Tempo Account for three years ending Dec 31, 2009.
Answer: Loss on sale Rs 10,000; balance Rs 4,74,000
6. On Jan 1, 2006, machineries were purchased by SUN Limited for Rs 4,00,000. On July 1, 2007, additions were made to the extent of Rs 80,000. On Apr 1, 2008, further additions were made to the extent of Rs 51,200. On June 30, 2009, one machinery, original value of which was Rs 64,000 on Jan 1, 2006, was sold for Rs 48,000. Depreciation is charged @ 10% p.a. on original cost.
You are required to show the Machinery Account for three years from 2006 to 2009 in the books of SUN Limited, which closes its books on Dec 31st.
Answer: Profit of sale Rs 6,400; Balance Rs 3,03,840
7. On Jan 1, 2006, machinery was purchased by EXY Ltd for Rs 1,00,000. On July 1, 2007 additions were made to the extent of Rs 20,000. On Apr 1, 2008, further additions were made to the extent of Rs 12,800.
On June 30, 2009, machinery original value of which was Rs 16,000 on Jan 1, 2006 was sold for Rs 12,000. Depreciation is charged @ 10% p.a. on original cost.
You are required to show the Machinery Account for the years from 2006 to 2009 in the books of EXY Ltd, it closes the books on Dec 31st.
Answer: Profit on sale Rs 1,600; Closing Balance: Rs 75,960
Model: Written Down Value Method:
8. Mr. A bought a machine for Rs 25,000 on which he spent Rs 5,000 for carriage and freight; Rs 1,000 for brokerage of the middleman; Rs 3,500 for installation and Rs 500 for an iron pad. The machine is depreciated @ 10% every year on written down basis. After three years the machine was sold to Mr. B for Rs 30,500 and Rs 500 was paid as commission to the broker. Find out the profit or loss on the sale of machine.
Answer: Profit on sale Rs 4,485
9. On Jan 1, 2007, Renu Ltd purchased a second hand machine for Rs 96,000 and spent Rs 24,000 on its carriage, repairs and installation. On Sep 30, 2008, this machine was sold for Rs 60,000. Depreciation is to be provided @ 20% p.a. according to Written Down Value Method.
Answer: Loss on sale Rs 22,080
10. On Jan 1, 2006, X Ltd purchased machinery for Rs 72,000 and on June 30, 2007 acquired additional machinery at a cost of Rs 12,000. On Mar 31, 2008 one of the original machines which had cost Rs 3,000 on Jan 1, 2006 was found to have become obsolete and was sold as scrap for Rs 300. It was replaced on that date by a new machine costing Rs 4,800. Depreciation is provided @ 15% p.a. on the written Down Value. The books are closed on Dec 31st every year.
You are required to show ledger accounts for the first three years.
Answer: Loss Rs 1,785; Balance Rs 56,070
11. Model: Provision for Depreciation:
On Jan 1, 2006, ABC Ltd purchased a machinery for Rs 12,00,000. On July 1, 2008, a part of the machinery purchased on Jan 1, 2006 for Rs 80,000 was sold for Rs 45,000 and a new machinery at a cost of Rs 1,58,000 was purchased and installed on the same date. Depreciation has to be provided at 10% p.a. on the original cost. You are required to show the necessary ledger accounts if: (i) Provision for Depreciation Account is maintained and (ii) Provision for Depreciation Account is not maintained.
Answer:
12. On Jan 1, 2006, LM Ltd purchased a machinery for Rs 48,00,000. On July 1, 2008, a part of the machinery was purchased on Jan 1, 2006 for Rs 3,20,000 was sold for Rs 1,80,000 and a new machinery at a cost of Rs 6,32,000 was purchased and installed on the same day. Depreciation has to be provided at 10% p.a. on the diminishing balance of the machinery.
You are required to show the necessary ledger account if (i) Provision for Depreciation Account is not maintained (ii) Provision for Depreciation Account is maintained.
Answer:
Model: Change in Depreciation Methods.
13. On Jan 1, 2008 Fortune Ltd purchased a machine for Rs 50,000 and provided depreciation @ 10 % p.a. At the end of 2009, the company decided to change the method of depreciation from Straight Line Method to Written Down Value Method retrospectively, the rate of depreciation remaining same. Prepare the Machinery Account for the year 2009.
Answer: Excess Depreciation Rs 1,450
14. On Jan 1, 2006, Renu Ltd purchased a machine for Rs 60,000 and provided depreciation @ 10% p.a. At the end of 2009, the company decided to change the method of depreciation from Written Down Value to Straight Line Method retrospectively, the rate of depreciation remaining the same. Prepare the Machinery Account for the year 2009.
Answer: (Deficit) Short Depreciation Rs 1,740
15. Machinery Account of LBM Ltd showed debit balance of Rs 97,200 on Jan 1, 2009. Depreciation was provided @ 10% p.a. On July 1, 2009, a part of the machinery purchased for Rs 30,000 on Jan 1, 2007 was sold for Rs 21,000 and on the same date a new machinery which costs Rs 60,000 was purchased. On Dec 31, 2009, the company decided to change the method of depreciation from Diminishing Balance Method to Fixed Installment Method effective from Jan 1, 2007 depreciation rate remaining unaltered.
Show the Machinery Account for 2009
Answer: Additional Depreciation Rs 1,200; Closing Balance Rs 1,20,000
16. Model: Sinking Fund Method
The Directors of MAC Ltd decided to replace their entire plant. They accepted the quotation of M/s APT @ Co amounting to Rs 22,50,000
The old Machinery and Plant Account stood at Rs 11,40,000. The accumulated balance of Depreciation Fund in the books of the company was Rs 9,73,500. The fund was represented by securities which were sold for Rs 9,74,900. Some of the materials comprising the old machinery were found to be in good condition. M/s APT @ Co agreed to take over this at an agreed value of Rs 70,500. The remainder of the old machinery was auctioned for Rs 25,600
Show the various accounts in the books of the company.
Answer: Profit on sale of investments Rs 1,400; Loss on sale Rs 69,000
17. XYZ Ltd purchased a machinery on Apr 1, 2004 for Rs 6,00,000. The machinery has to be replaced at he end of 5 years for which purpose a Sinking Fund is established. It is expected that securities will earn @ 10% p.a. interest. Sinking Fund Table shows that Re. 0.163797 invested in each year will produce Re. 1 at the end of 5 years at 10% p.a. interest. XYZ Ltd closes their accounts on Mar 31, each year.
At the end of the period, the securities are sold at their book value. New machinery was installed on Apr 1, 2009, at a cost of Rs 7,20,000.
You are required to show all the necessary ledger account for all the years.
18. Y Ltd traded a piece of equipment with an original cost of Rs 12,000 and accumulated depreciation to date of Rs 9,600 for another piece of equipment which had a list price of Rs 18,000. The payment for the new equipment consisted for a trade-in-allowance of Rs 4,200 on the old equipment plus Rs 13,800 cash. The old equipment could have been sold for Rs 3,300 cash.
You are required to give entries to record the exchange.
Answer: |
Profit on exchange Rs 600 is the difference between Rs 3,000 and Rs 2,400. Record new equipment at Rs 16,800 – an extra allowance of Rs 1,200 is treated as a reduction in the price of new equipment. |
19. A machine costing Rs 1,00,000 with no salvage value and estimated life 10 years had the following balances at the end of 2 years:
Machinery: Rs 1,00,000
Accumulated Depreciation: Rs 20,000
It was estimated that the future life would be 4 years instead of 8 years. You are requested to show the revision of rate to be recorded.
Answer: Revised depreciation per year: Rs 20,000
3.144.40.212