G1 4 Accounting for Depreciation [D01-J14]

Depreciation Methods of Depreciation & Methods of Accounting of Depreciation Comprehensive idea about depreciation including reasons for depreciation, thirteen methods of depreciation, three methods of accounting of depreciation and accounting standard 6

T K Sridhar [Singar Academy]

l.4 ACCOUNTING FOR DEPRECIATION

[CMA FOUNDATION D01, 4 Marks] Question 1: Write short notes on Depreciation. Answer: Depreciation is a loss in value of an Asset. It is measure of wearing out, consumption, or other loss in value of Depreciable Asset arising from use and passage of time. As per IAS4 - ‚Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life.‛ Depreciation Accounting: Depreciation Accounting is the process of allocation and not valuation.

[CMA INTER SY08, D12, 3 Marks] Question 2: State the criteria which should be fulfilled by a depreciable asset as per AS6 Answer: Depreciable Assets are assets which are: used during more than one year having a limited useful life held by an enterprise for use in : o

the production or supply of goods and services

o

for renting to others

o

for administrative purposes

o

not for the purpose of sale in the ordinary course of business.

Question 3: What is depreciable amount? Answer: Depreciable amount = historical cost – scarp value Depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during its useful life.

[CMA INTER J09, 5 Marks] Question 4: What are the objectives of charging depreciation and problems of measurement of depreciation? Explain. Answer: Prime objectives for providing Depreciation are: 1.

Correct income measurement: Depreciation should be charged for proper estimation of periodic profit or loss.

2.

True position statement: Value of the fixed assets should be adjusted for depreciation charged in order to depict the actual financial position.

Financial Accounting

4.1

3.

Funds for replacement: Generation of adequate funds in the hands of the business for replacement of the asset at the end of its useful life.

4.

Ascertainment of true cost of production: For ascertaining the cost of the production, it is necessary to charge depreciation as on item of cost of production.

Question 5: What is the nature of depreciation? 1.

Depreciation is non-cash operating expense which is to be provided whether there are profits or losses.

2.

Depreciation is concerned with historical cost and not with the fluctuations in market price.

Question 6: What are the Causes of Depreciation? 1.

Physical wear and tear. [permanent and continuous decrease in the book value of fixed assets due to use]

2.

Effluxion of time [Passage of time]

3.

Obsolescence [out-dated] [the economic deterioration by change in technology or taste or fashion]

4.

Depletion [physical deterioration of natural resources like ore deposits in mines, oil wells]

5.

Changes in economic environment

6.

Expiration of legal rights.

Question 7: What is amortization and dilapidation? Answer: Amortization refers to the economic deterioration of intangible assets like goodwill, patent obsolescence. Dilapidation - In one sentence Dilapidation means a state of deterioration due to old age or long use. This term refers to damage done to a building or other property during tenancy.

Question 8: What are the factors affecting Amount of Depreciation 1.

Historical Cost

2.

Expected Useful life

3.

Estimated Residual Value.

Note: All expenses incurred till the asset is put to use are treated as capital nature and hence form part of historical cost. Problems of measurement of depreciation are: 1.

Estimated useful life may be incorrect and misleading.

2.

Certain uncertain factors affect predetermined quantum of depreciation.

Accounting for Depreciation

4.2

Question 9: What are the methods of recording depreciation? Answer: Two Methods of Recording Depreciation

1

By Charging to Asset A/c

By Creating Provision for Depreciation A/c

Depreciation is credited to Asset A/c

Depreciation

is

credited

to

Provision

for

Depreciation A/c 2

Asset appears at its Written down Value

Asset appears at its Original Cost.

(i.e. Cost less depreciation till date)

Question 10: Most Commonly Employed 2 Methods of Providing Depreciation 1.

Straight Line Method (SLM)

2.

Written Down Value (WDV) Method

Question 11: Write short note disclosure requirements as per AS6 Answer: The historical cost of each class of assets; Total depreciation for the period. The related accumulated depreciation; Depreciation methods used; and Depreciation rates (if they are different from the principal rates specified in the statute governing the enterprise.)

Question 12: Distinction between Straight Line Method and Written Down Value Method Straight Line Method differs from Written Down Value Method in the following respects: Basis of

Straight Line Method

Written Down Value Method

Depreciation is calculated at a fixed

Depreciations is calculated at a fixed

percentage on the original cost.

percentage on original cost (in first year)

Distinction 1.

Basis

of

Calculation

and on written down value (in subsequent years). 2.

Amount

of

Depreciation

Financial Accounting

The

amount

remains constant

of

depreciation

The amount of depreciation goes on decreasing.

4.3

3.

Total

Charge

Total charge in later years is more

Total charge remains almost uniform year

(i.e.

as compared to that in earlier years

after year, since in earlier years the amount

Depreciation

since renewals goes on increasing

of depreciation is more and the amount of

plus repairs)

as the asset grows older, whereas

repairs and renewals is less whereas in

the amount of depreciation remains

latter years, the amount of depreciation is

constant year after year.

less and the amount of repairs & renewals is more.

4.

Book Value

The

book

value

of

the

asset

becomes zero or equal to its scrap

The book value of the asset does not become zero.

value. 5.

Suitability

This method is suitable for those

This method is suitable for those assets in

assets in relation (a) repair charges

relation to which (a) the amount of repairs

are less (b) the possibility of

& renewals goes on increasing as the asset

obsolescence is less

grows older and (b) the possibility of obsolescence are more.

6.

Calculation

–

Easy or difficult

It is easy to calculate the rate of

It is difficult to calculate the rate of

depreciation

depreciation.

Question 13: How to calculate amount and rate of depreciation under various methods? Method of

Calculation of Amount of Depreciation (D)

Depreciation

and Rate of Depreciation (r) Time Base

1

Straight Line Method (SLM)

or

Fixed

Installment Method 2

Written Down Value

Depreciation = Rate of Depreciation =

×100

Rate of Depreciation =1 – √

%

(WDV) Where, n = Useful life of the asset (in years) Amount of Depreciation = Book Value of the Asset × rate of Depreciation 3

Double

Declining

Depreciate two times when the assets are used for extra shift (or)

Method (or)

Accelerated rate of depreciation = Rate of depreciation in SLM ×

Accelerated

Accelerate %

Depreciation

Note: Accelerated may be 150%, 200% etc., depending upon the additional use of the asset

Accounting for Depreciation

4.4

4

Sum of Years’ Digits

Rate of Depreciation for 1st year = for 2nd year = for 3rd year = . . for nth year = Where Sum of Year’s Digits = ‘n’ refers to useful life of the asset (in years). Amount of Depreciation = (Original Cost Less Estimated Scrap Value) × Respective Rate of Depreciation for the given year. Source of Fund Base

Sinking Fund Factor

*where, ‘i’ is the rate of interest & ‘n’ is the life in years]

[SFF] Annuity Factor [AF] Present Value Factor

*where, ‘i’ is the rate of interest & ‘n’ is the life in years] *where, ‘i’ is the rate of interest & ‘n’ is the life in years+

[PVF] 5

Sinking

Fund

or

Depreciation = Amount required for replacement of the asset × SFF

Depreciation Fund 6

Annuity

Depreciation = (Original Cost – PVF × Scrap Value) × Annuity Factor Note: Under Annuity Method, interest is provided each year on the balance of asset and fixed amount of depreciation is charged each year. Suitable for financial lease.

7

Insurance Policy

Depreciation = Insurance Premium p.a. Use Base

8

Depletion

Rate of depreciation per unit = Depreciation = Actual Output (in units) × Depreciation p.u.

9

Machine Hour

Depreciation per machine hour= Depreciation= Actual Hours × Rate of Depreciation per Hour

Financial Accounting

4.5

10

Production Units

Depreciation per unit = Depreciation = Actual Production Units × Depreciation p.u.

11

Kilo meter

Depreciation per unit = Depreciation = Actual kilo meter × Depreciation p.k.m. Price Base

[CMA FOUNDATION D05, 4 Marks] Question: Write short notes on revaluation method of depreciations. 12

Revaluation Method

Depreciation = Opening Value + Purchases – Closing Value Note: Suitable for loose tools

13

Provision for Repairs

Depreciation =

& Renewals

Question 14: When can a Change in Method of Depreciation be made? Answer: If adoption of new method is required 1.

By Statue.

2.

To comply with accounting standard.

3.

To have more appropriate preparation & presentation of financial statements of enterprise

Question 15: Write a note on accounting for the retrospective effect in case of change in method of depreciation. Answer: Depreciation should be recalculated as per new method from the date of asset coming into use. Treatment of Deficiency: The deficiency should be debited to Statement of Profit & Loss Treatment of Surplus: The surplus should be credited to Statement of Profit & Loss.

[CMA FOUNDATION D02, 4 Marks] Question 16: Distinguish between depreciation and reserve. Answer: Depreciation is the process of allocating the cost of a Fixed Asset over its estimated useful life in a rational and systematic manner, whereas Reserve is an appropriation of profit. Due to depreciation, net profit is reduced but Reserve does not affect the net profit. Reserves are created to strengthen financial position and to meet unforeseen losses, whereas depreciation is provided to ascertain the correct profit and correct book value of fixed asset. Reserves are the undistributed profits and belong to the owner’s equity. Depreciation is a rational estimate of a decline in the usefulness of an Asset due to consumption, use, passage of time, technological changes etc.

Accounting for Depreciation

4.6

True or false 1.

The useful life of a depreciable asset is the period over which the asset is expected to be used by the enterprise, which is generally greater than the physical life.1 [CMA INTER SY08, D13, 1 Mark]

2.

Sinking fund method of depreciation takes into account the cost of an asset as well as interest also thereon at given rate.2 [CMA INTER SY08, J13, 1 Mark]

3.

One of the objectives achieved by providing depreciation is saving cash resources for future replacement of assets.3 [CMA INTER SY08, J12, 1 Mark]

4.

There exists difference between the Written Down Value method and Diminishing Balance Method of depreciation.4 [CA-CPT N96 & Similar N00, 2 Marks]

5.

The expressions – depreciation is to be charged at 10% and 10% p.a. on furniture and fittings carry the same meaning.5 [CA-CPT M97, 2 Marks]

6.

Higher depreciation will not affect cash profit of the business. 6 [CA-CPT M99 & Similar N02, 2 Marks]

7.

Land is also depreciable assets.7 [CA-CPT M01, 2 Marks]

8.

Depreciation is a process of allocation of the cost of fixed asset. 8 [CA-CPT N03, 2 Marks]

Fill in the blanks 1.

One of the characteristics of depreciation is that it is a _________ against profit [charge, appropriation]9 [CMA INTER SY08, D13, 1 Mark]

PRACTICAL PROBLEMS

Calculation of Amount of Depreciation under SLM, WDV, DDM and SDY Question 1: Calculate amount of depreciation under Straight Line Method, Written Down Value Method, Sum of the Years’ Digits Method and Double Decline Method Original Value of the Asset – ₹65,000 False – useful life is always shorter than physical life False – sinking fund considers interest for the reinvestment not as a charge but in annuity method of depreciation, interest on investment in assets is considered as a charge. 3 True – the amount of depreciation is accumulated in a separate fund called sinking fund. 4 False – Both are the same methods. Depreciation is computed by applying a fixed rate on the diminish balance which is known as written down value. 5 False – They differ on the basis of time factor. 10% p.a. implies that time factor is to be considered while calculating depreciation. Whereas simply 10% implies that time factor is immaterial for calculation. 6 True – it is a non-cash expenses 7 False – Land is not a depreciable asset except if the useful life of the land is given. 8 True 9 Charge 1 2

Financial Accounting

4.7

Scrap Value of the Asset – ₹5,000 Life – 3 years Answer: Calculation of rate of depreciation under different methods SLM

WDV

DDM

SDM Yr

1- √

%

%

Depreciation

Formula

‘d’

1

%

2

%

3

%

rate of SLM × 2 1- √

% = 30.77%

%=57.47%

30.77×2 = 61.54%

Where: Sum of Year’s Digits =

Year

Particulars

SLM

WDV

DDM

SDM

0

Original Value

65,000

65,000

65,000

65,000

1

Depreciation

20,000

37,356

40,000

30,000

1

Written Down Value

45,000

27,644

25,000

35,000

2

Depreciation

20,000

15,887

15,385

20,000

2

Written Down Value

25,000

11,757

9,615

15,000

3

Depreciation

20,000

6,757

4,6151

10,000

3

Scrap Value

5,000

5,000

5,000

5,000

Journal Entries

SLM Debit

Assets A/c

Dr

Credit

65,000

WDV Debit

Credit

65,000

DDM Debit

Credit

65,000

SYD Debit

Credit

65,000

0 To Cash A/c Depreciation A/c 1

Dr

20,000

To Assets Profit and Loss A/c

1

65,000

65,000 37,356

20,000 Dr

20,000

65,000 40,000

37,356 37,356

65,000 30,000

40,000 40,000

30,000 30,000

Last year, depreciation is the balancing charge to make it equal to scrap value

Accounting for Depreciation

4.8

To Depreciation

20,000

Depreciation A/c

Dr

20,000

To Assets

37,356 15,887

20,000

40,000 15,385

15,887

30,000 20,000

15,385

20,000

2 Profit and Loss A/c

Dr

20,000

To Depreciation

15,887 20,000

Depreciation A/c

Dr

20,000

To Assets

15,887 6,757

20,000

Profit and Loss A/c

Dr

15,385

20,000

20,000 15,385

4,615 6,757

6,757

20,000 10,000

4,615 4,615

10,000 10,000

3 To Depreciation Cash A/c

20,000 Dr

5,000

To Assets A/c

6,757 5,000

5,000

4,615 5,000

5,000

10,000 5,000

5,000

5,000

Calculation of Amount of Depreciation under depletion method Question 2: Pensive Corporation’s subsidiary Pensive Oil drills a well with the intention of extracting oil from a known reservoir. It incurs the following costs related to the acquisition of property and development of the site: ₹ Land purchase

2,80,000

Road construction

23,000

Drill pad construction

48,000

Drilling fees

1,92,000

Total

5,43,000

In addition, Pensive Oil estimates that it will incur a site restoration cost of ₹57,000 once extraction is complete, so the total depletion base of the property is ₹600,000. Pensive’s geologists estimate that the proven oil reserves that are accessed by the well are 400,000 barrels. Pensive Oil extracts 100,000 barrels and 3,00,000 barrels in the first and second year Answer: Rate of depreciation per unit =

Year 0

Financial Accounting

=

Particulars Original Value with provision for site restoration cost

= ₹1.50

₹ 6,00,000

4.9

1,00,000 barrels × ₹1,50

1

Depreciation

1

Written Down Value

2

Depreciation

2

Written Down Value

1,50,000 4,50,000

3,00,000 barrels × ₹1,50

4,50,000 0

Journal Entries

Debit

Assets A/c

Dr

Credit

5,43,000

0 To Cash A/c

5,43,000

Depreciation A/c

Dr

1,50,000

To Assets

1,50,000

1 Profit and Loss A/c

Dr

1,50,000

To Depreciation

1,50,000

Depreciation A/c

Dr

4,50,000

To Assets

4,50,000

Profit and Loss A/c 2

Dr

4,50,000

To Depreciation

4,50,000

Asset A/c

Dr

57,000

To Cash

57,000

(Asset restoration cost)

Question 3: On 01.04.2012, machine purchased at ₹5,00,000 with a scrap value of ₹1,00,000 has life of running 2,00,000 machine hours or producing 1,00,000 units Year

Machine Hours

Production Units

2012-13

50,000

25,000

2013-14

1,00,000

50,000

2014-15

50,000

25,000

Calculate amount of depreciation under machine hour rate and production unit rate Answer: Method 1

Machine Hour Rate

Accounting for Depreciation

Formula

Calculation ₹2

4.10

2

₹4

Production Unit Rate

Year

Particulars

Machine Hour

0

Original Value

1

Depreciation

1

Written Down Value

2

Depreciation

2

Written Down Value

3

Depreciation

3

Scrap Value

Production Unit

5,00,000 50,000×₹2

1,00,000

5,00,000 25,000×₹4

4,00,000 1,00,000×₹2

2,00,000

4,00,000 50,000×₹4

2,00,000 50,000×₹2

1,00,000

1,00,000

2,00,000 2,00,000

25,000×₹4

1,00,000

1,00,000 1,00,000

Question 4: On 01.04.2012, lorry purchased at ₹25,00,000 with a scrap value of ₹5,00,000 has life of running 2,00,000 kilo meters Year

Kilo meters

2012-13

80,000

2013-14

80,000

2014-15

40,000

Calculate amount of depreciation under kilo meter travelled method Answer: Method

Formula

Calculation ₹10

Depreciation per kilo meter

Year

Financial Accounting

Particulars

0

Original Value

1

Depreciation

1

Written Down Value

2

Depreciation

2

Written Down Value

3

Depreciation

3

Scrap Value

Machine Hour 25,00,000 80,000×₹10

8,00,000 17,00,000

80,000×₹10

8,00,000 9,00,000

40,000×₹10

4,00,000 5,00,000

4.11

Question 5: On 01.01.10, An asset is purchased for ₹1,00,000 has a residual value of ₹20,000 at the end of 3rd year. Expected cost for repairs and renewal during the life is ₹70,000. Actual repair costs are ₹20,000, ₹25,000 and ₹30,000 in the years I, II and III respectively. At end of third year, the asset is sold for ₹15,000. Answer: Depreciation under Provision for Repairs & Renewals Formula

Calculation

Depreciation

50,000

Journal Entries 0

Assets A/c

Debit Dr

1,00,000

To Cash A/c 1

Depreciation A/c

1,00,000 Dr

50,000

To Provision for repairs A/c Profit and Loss A/c

50,000 Dr

50,000

To Depreciation Repairs A/c

50,000 Dr

20,000

To Cash A/c Provision for repairs A/c

20,000 Dr

20,000

To Repairs A/c 2

Depreciation A/c

20,000 Dr

50,000

To Provision for repairs A/c Profit and Loss A/c

50,000 Dr

50,000

To Depreciation Repairs A/c

50,000 Dr

25,000

To Cash A/c Provision for repairs A/c

25,000 Dr

25,000

To Repairs A/c 3

Depreciation A/c

25,000 Dr

50,000

To Provision for repairs A/c Profit and Loss A/c

50,000 Dr

50,000

To Depreciation Repairs A/c

Accounting for Depreciation

Credit

50,000 Dr

30,000

4.12

To Cash A/c

30,000

Provision for repairs A/c

Dr

30,000

To Repairs A/c

30,000

Cash A/c

Dr

15,000

Provisions for repairs A/c

Dr

75,000

Loss on sale A/c

Dr

20,000

To Assets

1,00,000

Dr.

Assets A/c

Date 01.01.10

To

Cr.

Particular

Amount

Date

Bank – Purchase

1,00,000

31.12.10

By

Particular

Amount

Balance c/d

1,00,000

1,00,000 01.01.11

Balance b/d

1,00,000

1,00,000 31.12.11

Balance c/d

1,00,000 01.01.12

Balance b/d

1,00,000

1,00,000 31.12.12

Cash A/c

15,000

Provision A/c

75,000

Loss on Sale

10,000

1,00,000

Dr.

31.12.10

1,00,000

Provision for repairs, renewal and depreciation A/c

Date

Particular To

Amount

Repairs A/c

20,000

Balance c/d

30,000

1,00,000

Date 31.12.10

Particular By

Profit and Loss A/c

50,000

Cr. Amount 50,000

50,000

01.01.11

Repairs A/c

25,000

01.01.11

Balance b/d

30,000

31.12.11

Balance c/d

55,000

01.10.11

Profit and Loss A/c

50,000

80,000 31.12.12

Repairs A/c

30,000

01.01.12

Balance b/d

55,000

Asset A/c

75,000

01.10.12

Profit and Loss A/c

50,000

1,05,000

Financial Accounting

80,000

1,05,000

4.13

Question 6: The value of loose tools available on 01.04.2013 is ₹ 1,00,000. Loose tools are purchased during 2013-14 are ₹50,000. The value of loose tools as per revaluation on 31.03.2014 is ₹75,000. Find out the depreciation under revaluation method. Answer: Depreciation

Opening Value + Purchases – Closing Value

Depreciation

1,00,000 + 50,000 – 75,000

Journal Entries Loose Tools A/c

75,000

Debit Dr

Credit

50,000

0 To Cash A/c Depreciation A/c

50,000 Dr

75,000

To Loose Tools

75,000

1 Profit and Loss A/c

Dr

75,000

To Depreciation

75,000

Question 7: Asset purchased for ₹1,00,000, ₹50,000 and ₹2,00,000 on 1.1.2010, on 1.10.2011 and on 1.1.2012 respectively. On 1.10.2011, the asset purchased on 1.1.2010 was sold for ₹70,000. The rate of depreciation of the above assets is 10% under straight line method. Prepare assets a/c under different methods of accounting for the treatment of depreciation. Answer: Method I [Charging depreciation to asset a/c] Journal Entries

SLM

Date

Debit Assets A/c

Dr

Credit

1,00,000

01.01.10 To Cash A/c Depreciation A/c

1,00,000 Dr

10,000

To Assets

10,000

31.01.10 Profit and Loss A/c

Dr

10,000

To Depreciation Assets A/c

10,000 Dr

50,000

01.07.11 To Cash A/c 01.10.11

Accounting for Depreciation

Cash A/c

50,000 Dr

70,000

4.14

Loss on Sale A/c

Dr

12,500

Depreciation A/c

Dr

7,500

To Assets A/c

90,000

Depreciation A/c

Dr

1,250

To Assets

1,250

31.12.11 Profit and Loss A/c

Dr

8,750

To Depreciation Assets A/c

8,750 Dr

2,00,000

01.01.12 To Cash A/c

2,00,000

Depreciation A/c

Dr

25,000

To Assets

25,000

3 Profit and Loss A/c

Dr

25,000

To Depreciation

Dr.

Assets A/c

Date 01.01.10

25,000

To

Particular

Amount

Date

Bank – Purchase

1,00,000

31.12.10

Cr. Particular By

Depreciation –

Amount 10,000

(₹1,00,000 ×10/100) Balance c/d 1,00,000 01.01.11

Balance b/d

90,000

01.07.11

Bank – Purchase

50,000

90,000 1,00,000

01.10.11

Depreciation

7,500

(₹1,00,000 ×10/100×9/12)

31.12.11

P/L A/c [Loss]

12,500

Cash

70,000

Depreciation

1,250

(₹50,000×10/100×3/12) Balance c/d 1,40,000 01.01.12

Balance b/d Bank- Purchase

Financial Accounting

48,750 2,00,000

48,750 1,40,000

31.12.12

Depreciation

25,000

(₹2,50,000×10/100)

4.15

Balance c/d

2,23,750

2,48,750 01.01.13

2,48,750

2,23,750

Method II [Provision for depreciation method]

Journal Entries

SLM

Date

Debit Assets A/c

Dr

Credit

1,00,000

01.01.10 To Cash A/c Depreciation A/c

1,00,000 Dr

10,000

To Provision for Depreciation A/c

10,000

31.01.10 Profit and Loss A/c

Dr

10,000

To Depreciation Assets A/c

10,000 Dr

50,000

01.07.11 To Cash A/c Depreciation A/c

50,000 Dr

7,500

To Provision for Depreciation A/c

7,500

Cash A/c

Dr

70,000

Loss on Sale A/c

Dr

12,500

Provision for Depreciation A/c

Dr

17,500

01.10.11

To Assets A/c Depreciation A/c

1,00,000 Dr

1,250

To Provision for Depreciation A/c

1,250

31.12.11 Profit and Loss A/c

Dr

8,750

To Depreciation Assets A/c

8,750 Dr

2,00,000

01.01.12 To Cash A/c Depreciation A/c

2,00,000 Dr

25,000

31.12.12 To Provision for Depreciation A/c

Accounting for Depreciation

25,000

4.16

Profit and Loss A/c

Dr

25,000

To Depreciation

Dr.

25,000

Assets A/c

Date 01.01.10

To

Particular

Amount

Date

Bank – Purchase

1,00,000

31.12.10

Cr. Particular By

Amount

Balance c/d

1,00,000

1,00,000 01.01.11

Balance b/d

01.10.11

Bank – Purchase

1,00,000

1,00,000 01.10.11

50,000

31.12.11

Provision for depreciation

17,500

P/L A/c [Loss]

12,500

Cash

70,000

Balance c/d

50,000

1,50,000 01.01.12

Balance b/d Bank- Purchase

50,000

1,50,000 31.12.12

Balance c/d

2,00,000 2,50,000

01.01.13

2,50,000

2,50,000

Dr.

Provision for Depreciation A/c

Date 31.12.10

2,50,000

To

Particular

Amount

Balance c/d

10,000

Date 31.12.10

Cr. Particular

By

Depreciation

Amount 10,000

(₹1,00,000 ×10/100) 10,000

10,000

01.01.11

Assets A/c

17,500

01.01.11

Balance b/d

10,000

31.12.11

Balance b/d

1,250

01.10.11

Depreciation

7,500

(₹1,00,000 ×10/100×9/12) 31.12.11

Depreciation

1,250

(₹50,000 ×10/100×3/12) 18,750 31.12.12

Financial Accounting

Balance c/d

26,250

18,750 01.01.12

Balance b/d

1,250

01.10.12

Depreciation

25,000

4.17

(₹2,50,000 ×10/100) 26,250

26,250 01.01.13

Balance b/d

26,250

Method III [Provision for depreciation method and disposal of assets a/c]

SLM Journal Entries Date

Debit Assets A/c

Dr

Credit

1,00,000

01.01.10 To Cash A/c Depreciation A/c

1,00,000 Dr

10,000

To Provision for Depreciation A/c

10,000

31.01.10 Profit and Loss A/c

Dr

10,000

To Depreciation Assets A/c

10,000 Dr

50,000

01.07.11 To Cash A/c Depreciation A/c

50,000 Dr

7,500

To Provision for Depreciation A/c Asset Disposal A/c

7,500 Dr

1,00,000

To Asset A/c

1,00,000

01.10.11 Cash A/c

Dr

70,000

Loss on Sale A/c

Dr

12,500

Provision for Depreciation A/c

Dr

17,500

To Assets Disposal A/c Depreciation A/c

1,00,000 Dr

1,250

To Provision for Depreciation A/c

1,250

31.12.11 Profit and Loss A/c

Dr

8,750

To Depreciation Assets A/c

8,750 Dr

2,00,000

01.01.12 To Cash A/c

Accounting for Depreciation

2,00,000

4.18

Depreciation A/c

Dr

25,000

To Provision for Depreciation A/c

25,000

31.12.12 Profit and Loss A/c

Dr

25,000

To Depreciation

Dr.

Assets A/c

Date 01.01.10

25,000

To

Particular

Amount

Date

Bank – Purchase

1,00,000

31.12.10

Cr. Particular By

Balance c/d

1,00,000 01.01.11

Balance b/d

01.10.11

Bank – Purchase

Balance b/d

1,00,000

01.10.11

Assets Disposal A/c

50,000

31.12.11

Balance c/d

50,000

Bank- Purchase

50,000

31.12.12

Balance c/d

2,50,000

2,00,000 2,50,000

2,50,000

Dr.

Provision for Depreciation A/c

Date 31.12.10

1,00,000

1,50,000

2,50,000 01.01.13

1,00,000 1,00,000

1,50,000 01.01.12

Amount

Particular To

Balance c/d

Amount 10,000

Date 31.12.10

Cr. Particular

By

Depreciation

Amount 10,000

(₹1,00,000 ×10/100) 10,000 01.01.11

Assets Disposal

31.12.11

Balance b/d

10,000

17,500

01.01.11

Balance b/d

10,000

1,250

01.10.11

Depreciation

7,500

₹1,00,000 ×10/100×9/12 31.12.11

Depreciation

1,250

(₹50,000 ×10/100×3/12) 18,750 31.12.12

Balance c/d

Financial Accounting

26,250

18,750 01.01.12

Balance b/d

1,250

01.10.12

Depreciation

25,000

4.19

(₹2,50,000 ×10/100) 26,250

26,250 01.01.13

Dr.

26,250

Assets Disposal A/c

Date 01.10.11

Balance b/d

To

Particular

Amount

Date

Assets

1,00,000

01.01.11

Cr. Particular

By

Amount

Provision for depreciation

17,500

Profit and Loss A/c [loss]

12,500

Cash A/c

70,000

100,000

100,000

Question 8: A plant and machinery was purchased on 01.04.2010 for ₹1,20,000. The plant and machinery had a life of 3 years with the residual value of ₹20,000. Calculate amount of depreciation, pass journal entries and prepare ledger a/c under 1.

Sinking fund method

2.

Annuity method and

3.

Insurance Policy Method

Assume the rate of interest of 10% p.a. for sinking fund method and annuity method. Insurance premium is payable at ₹ 30,000 p.a. at the beginning of every year. Also rework under the insurance policy method, assuming the asset was destroyed at the end of the second year and salvage value recovered was ₹30,000. The insurance claim receivable is ₹90,000 Answer: Formula

Calculation

Sinking Fund Factor

0.30211

Annuity Factor

0.40211

Present

Value

0.7513

Factor Calculation of Amount of Depreciation 1

Sinking Fund

Amount required for replacement ×

(1,20,000–20,000)×0.30211

30,211

(1,20,000 – 20,000× 0.7513)

42,211

SFF 2

Annuity

(Original Cost – PVF × Scrap Value)

Accounting for Depreciation

4.20

× Annuity Factor 3

Insurance Policy

× 0.40211

Insurance Premium

30,000

Method I: Sinking Fund Method Year

Journal Entries Plant and Machinery A/c

Debit Dr

Credit

1,20,000

0 To Bank A/c Profit and Loss A/c

1,20,000 Dr

30,211

To Depreciation Fund Reserve A/c

30,211

1 Depreciation Fund Investment A/c

Dr

30,211

To Bank A/c Bank A/c

30,211 Dr

3,021

To Interest on Depreciation Fund Investment A/c

2

3,021

Profit and Loss A/c

Dr

30,211

Interest on Depreciation Fund Investment A/c

Dr

3,021

To Depreciation Fund Reserve A/c Depreciation Fund Investment A/c

33,232 Dr

33,232

To Bank A/c Bank A/c

33,232 Dr

6,344

To Interest on Depreciation Fund Investment A/c

6,344

Profit and Loss A/c

Dr

30,211

Interest on Depreciation Fund Investment A/c

Dr

6,344

To Depreciation Fund Reserve A/c

36,555

3 Bank A/c

Dr

63,443

To Depreciation Fund Investment A/c

63,443

Bank A/c

Dr

20,000

Depreciation Fund Reserve A/c

Dr

1,00,000

To Assets A/c

Financial Accounting

1,20,000

4.21

Method II: Annuity Method Year

Journal Entries Plant and Machinery A/c

Debit Dr

Credit

1,20,000

0 To Bank A/c

1,20,000

Plant and Machinery A/c

Dr

12,000

To Interest A/c

12,000

Depreciation A/c

Dr

42,211

1 To Plant and Machinery A/c Profit and Loss A/c

42,211 Dr

42,211

To Depreciation A/c

42,211

Plant and Machinery A/c

Dr

8,979

To Interest A/c

8,979

Depreciation A/c

Dr

42,211

2 To Plant and Machinery A/c Profit and Loss A/c

42,211 Dr

42,211

To Depreciation A/c

42,211

Plant and Machinery A/c

Dr

5,656

To Interest A/c

5,656

Depreciation A/c

Dr

42,211

To Plant and Machinery A/c

42,211

3 Profit and Loss A/c

Dr

42,211

To Depreciation A/c

42,211

Assets A/c

Dr

20,000

To Bank A/c

20,000

Method III: Insurance Policy Method Year

Narration

0

Asset purchased

Journal Entries Plant and Machinery A/c

Debit Dr

1,20,000

To Bank A/c 1

Premium Paid

Accounting for Depreciation

Depreciation Insurance Policy A/c

Credit

1,20,000 Dr

30,000

4.22

To Bank A/c

30,000

Depreciation A/c

Dr

30,000

Provision created To Depreciation Provisions A/c Depreciation transferred to P/L a/c

30,000

Profit and Loss A/c

Dr

30,000

To Depreciation A/c

30,000

Depreciation Insurance Policy A/c

Dr

30,000

Premium Paid To Bank A/c

30,000

Depreciation A/c

Dr

30,000

Provision created

2

To Depreciation Provisions A/c Depreciation transferred to P/L a/c

30,000

Profit and Loss A/c

Dr

30,000

To Depreciation A/c

30,000

Depreciation Insurance Policy A/c

Dr

30,000

Premium Paid To Bank A/c

30,000

Depreciation A/c

Dr

30,000

Provision created To Depreciation Provisions A/c Depreciation transferred to P/L a/c 3

30,000

Profit and Loss A/c

Dr

30,000

To Depreciation A/c

30,000

Bank A/c

Dr

1,00,000

Policy realized To Depreciation Insurance Policy A/c Depreciation Insurance Policy A/c

1,00,000 Dr

10,000

Profit on policy transferred To Depreciation Provision A/c

Asset sold

10,000

Bank A/c

Dr

20,000

Depreciation Provision A/c

Dr

1,00,000

To Asset A/c

Dr.

Assets A/c

Date 01.04.10

1,20,000

To

Particular

Amount

Date

Bank – Purchase

1,20,000

31.03.11

Cr. Particular By

Balance c/d

1,20,000 01.04.11

Balance b/d

Financial Accounting

1,20,000

Amount 1,20,000 1,20,000

31.03.12

Balance c/d

1,20,000

4.23

1,20,000 01.04.12

Balance b/d

1,20,000

1,20,000 31.03.13

Bank A/c

20,000

Provision for Depreciation 1,20,000

Dr.

1,20,000

Provision for Depreciation A/c

Date 31.03.11

31.03.12

To

Particular

Amount

Balance c/d

30,000

31.03.11

Balance c/d

60,000

Date

Cr. Particular

Amount

Depreciation

30,000

01.04.11

Balance b/d

30,000

31.03.12

Depreciation

30,000

By

60,000 31.12.12

1,00,000

60,000 01.04.12

Balance b/d

60,000

31.03.12

Depreciation

30,000

31.03.12

Insurance Policy

10,000

1,00,000

1,00,000

Method III: Insurance Policy Method assuming the asset destroyed in second year Year

Narration

0

Asset purchased

Journal Entries Plant and Machinery A/c

Debit Dr

1,20,000

To Bank A/c Depreciation Insurance Policy A/c

Credit

1,20,000 Dr

30,000

Premium Paid To Bank A/c Depreciation A/c 1

30,000 Dr

30,000

Provision created To Depreciation Provisions A/c Depreciation transferred to P/L a/c

Profit and Loss A/c

30,000 Dr

30,000

To Depreciation A/c Depreciation Insurance Policy A/c

30,000 Dr

30,000

Premium Paid 2

To Bank A/c Provision created

Accounting for Depreciation

Depreciation A/c

30,000 Dr

30,000

4.24

To Depreciation Provisions A/c Depreciation transferred to P/L a/c

30,000

Profit and Loss A/c

Dr

30,000

To Depreciation A/c

30,000

Bank A/c

Dr

90,000

Policy realized To Depreciation Insurance Policy A/c Depreciation Insurance Policy A/c

90,000 Dr

30,000

Profit on policy transferred To Depreciation Provision A/c

Asset sold

30,000

Bank A/c

Dr

30,000

Depreciation Provision A/c

Dr

90,000

To Asset A/c

1,20,000

[CMA RTP J11] Question 9: M/s Suba chemicals has imported a machine on 1 st July 2007 for $ 6,000 paid customs duty and freight ₹52,000 and incurred erection charges ₹20,000. Another local machinery costing ₹ 1,00,000 was purchased on January 1, 2008. On 1st July 2009, a portion of the imported machinery (value one-third) got out of order and was sold for ₹34,800. New Machinery was purchased to replace the same for ₹50,000. Depreciation is to be calculated at 20% p.a. on straight-line method. Prepare the Machinery Account and Machinery Disposal Account for 2007, 2008 and 2009. Exchange rate is ₹38 per $ Answer: Dr.

Machinery Account – Books of M/s. Suba Chemicals

Date 01.07.07

To

Particular

Amount

Date

Bank – Purchase

2,28,000

31.12.07

Particular By

Depreciation –

Cr. Amount 30,000

(₹3,00,000 ×20/100×1/2) Bank – Duty etc.

52,000

Bank – Erection

20,000

Balance c/d

3,00,000 01.01.08

Balance b/d

2,70,000

Bank – Purchase

1,00,000

3,00,000 31.12.08

Depreciation i. 3,00,000 × 20/100

60,000

ii. 1,00,000 × 20/100

20,000

Balance c/d 3,70,000 01.01.09

Balance b/d

Financial Accounting

2,90,000

2,70,000

2,90,000 3,70,000

01.07.09

Machinery disposal A/c

60,000

4.25

Depreciation: i. 1,00,000 × 20/100×1/2 Bank- Purchase

50,000

31.12.09

10,000

Depreciation: i. 2,00,000 × 20/100

40,000

ii. 1,00,000 × 20/100

20,000

iii. 50,000 × 20/100× ½

5,000

Balance c/d

2,05,000

3,90,000 01.01.10

3,90,000

2,05,000

Dr.

Machinery Disposal Account

Date 01.07.09

To

Particular

₹

Machinery

60,000

Date

Cr. ₹

Particular

01.07.09

By

Bank – Sale Proceeds

34,800

Profit & Loss A/c

25,200

60,000

60,000

Note: 1.

Book value of Machinery as on July 1, 2009 will be as follows: ₹ Original Cost on July 1, 2007 (3,00,000 × 1/3) Less

1,00,000

Depreciation for 2007 (for 6 months) (1,00,000 × 20/100×1/2)

10,000 90,000

Less

Depreciation for 2008 (1,00,000 × 20/100)

20,000 70,000

Less

Depreciation for 2009 (for 6 months) (1,00,000 × 20/100×1/2)

10,000 60,000

2.

If ‘Machinery Disposal Account’s is not kept, then Machinery account for the year 2009 will be prepared as under: Dr.

Machinery Account (for 2009)

Date 01.01.09

To

Particular

Amount

Date

Balance b/d

2,90,000

01.07.09

Accounting for Depreciation

Cr. Particular

By

Depreciation

Amount 10,000

4.26

Bank

50,000

Bank- Sale Proceeds

34,800

Profit & Loss A/c

25,200

Loss on Sale (60,000 – 34,800) Depreciation

65,000

Balance c/d

2,05,000

3,40,000 01.01.10

Balance b/d

3,40,000

2,05,000

[CMA INTER SY08, J13, 5 Marks] Question 10: On December, 2011 two machines, which were purchased on 1 st October, 2008 costing ₹50,000 and ₹20,000 respectively had to be discarded and replaced by two new machines costing ₹50,000 and ₹25,000 respectively. One of the discarded machines was sold for ₹20,000 and other for ₹10,000. The balance of Machinery Accounts as on April 1, 2011 was ₹3,00,000 against which the depreciation provision stood at ₹1,50,000. Depreciation was provided @ 10% on Reducing Balance Method. Prepare the Machinery A/c, Provision for Depreciation A/c and machinery Disposal A/c. Answer: Dr

Machinery Account

Date 1-4-2011

To

31-12-11

Particulars

Amt. ( ₹)

Date

Balance c/d

3,00,000

31-12-2011

75,000

31-03-2012

Bank

Cr Particulars

By

Amt. ( ₹)

Machinery Disposal Balance c/d

3,75,000 1-4-2013

Balance b/d

Dr.

31.12.11

3,25,000

Particulars To

Machinery Disposal a/c

Amt. ( ₹) 20,175

[16,135+4,040] 31.03.12

Balance c/d

Date 01.04.11 31.12.11

1,41,314

Cr. Particulars

By

Balance b/d P & L A/c [WN 1]

Amt. ( ₹) 1,50,000 11,489

31.03.12

1,61,489

1,61,489 1-4-12

Financial Accounting

3,25,000 3,75,000

Provision for Depreciation Account

Date

70,000

Balance b/d

1,41,314

4.27

Dr.

Machinery Disposal Account

Date 31-12-11

To

Particulars

₹

Date

Machinery A/c

70,000

31-12-11

By

Cr. Particulars

₹

Provision for Depreciation A/c

20,175

Bank

30,000

P & L A/c (Bal fig.)

19,825

70,000

70,000

Working Notes: 1.

Depreciation on the machines till April 1, 2012 01.10.08

Original Value Depreciation [01.10.08-31.03.09] Written Down Value

31.03.09

Depreciation [01.04.09-31.03.10] Written Down Value

31.03.10

Depreciation [01.04.10-31.03.11] Written Down Value

31.03.11

Machine 1

Machine 2

Total

50,000

20,000

70,000

2,500

1,000

3,500

47,500

19,000

66,500

4,750

1,900

6,650

42,750

17,100

59,850

4,275

1,710

5,985

38,475

15,390

53,865

Depreciation [01.04.11-31.12.11] Written Down Value

31.12.11

Total depreciation on assets sold

16,135

[3,500+6,650+5,985] Depreciation on Discarded Machine

2

Book Value of Machine as on 01.04.2011 Less

53,865

Depreciation @ 10% for 9 months [till 31.12.11]

4,040

Value of Discarded Machine as on selling date

49,825

Depreciation of machinery in use

3

Value of machinery on 1st April, 2011 Less

3,00,000

Cost of discarded machines:

70,000 2,30,000

Less

Provision for Depreciation on 1 April, 2011

1,50,000

Less: Depreciation on discarded machines:

16,135

Accounting for Depreciation

1,33,865

4.28

96,135

Add

Depreciation @ 10% on 96,135

9,614

Depreciation for 3 months on ₹75,000

1,875 11,489

[CMA RTP J12] Question 11: On December, 2011 two machines, which were purchased on 1st October, 2008 costing ₹30,000 and ₹24,000 respectively had to be discarded and replaced by two new machines costing ₹40,000 and ₹30,000 respectively. One of the discarded machines was sold for ₹16,000 and other for ₹6,000. The balance of Machinery Accounts as on April 1, 2011 was ₹5,00,000 against which the depreciation provision stood at ₹2,10,000. Depreciation was provided @ 10% on WDV method. Prepare the Machinery A/c, Provision for Depreciation A/c and machinery Disposal A/c. Answer: Dr

Machinery Account

Date 1-4-2011

To

31-12-11

Particulars

Amt. ( ₹)

Balance c/d

500000

31-12-2011

70000

31-03-2012

Bank

Cr

Date

Particulars By

Amt. ( ₹)

Machinery Disposal Balance c/d

570000 1-4-2013

Balance b/d

Dr.

31.12.11

31.03.12

516000

Particulars To

Machinery Disposal a/c

Balance c/d

Amt. ( ₹) 15,564

224147

Date 01.04.11

Cr. Particulars

By

Balance b/d

Amt. ( ₹) 2,10,000

31.12.11

P & L A/c [WN 1]

3,116

31.03.12

P & L A/c [WN 1]

26,595

2,39,711

2,39,711 1-4-12

Financial Accounting

516000 570000

Provision for Depreciation Account

Date

54000

Balance b/d

224147

4.29

Dr.

Machinery Disposal Account Particulars

₹

Date

Machinery A/c

54,000

31-12-11

Date 31-12-11

To

By

Cr. Particulars

₹

Provision for Depreciation A/c

15,564

Bank

22,000

P & L A/c (Bal fig.)

16436

54,000

54000

Working Notes: 1.

Depreciation on the two machines till April 1, 2012 01.10.08

Original Value

Written Down Value Depreciation [01.04.09-31.03.10] Written Down Value

31.03.10

Depreciation [01.04.10-31.03.11] Written Down Value

31.03.11

Depreciation [01.04.11-31.12.11] Written Down Value

31.12.11

₹

54,000

Depreciation [01.10.08-31.03.09] 31.03.09

₹

Total depreciation on assets sold

2,700 51,300 5,130 46,170 4,617 41,553 3,116 38,436 15,564

Depreciation of machinery in use

2

Value of machinery on 1st April, 2011 Less

5,00,000

Cost of discarded machines:

54,000 4,46,000

Less

Provision for Depreciation on 1 April, 2011

2,10,000

Less: Depreciation on discarded machines:

12,447

1,97,553 2,48,447

Depreciation @ 10% on 2,48,447 Add

Depreciation for 3 months on ₹70000

24,845 1,750 26,595

Accounting for Depreciation

4.30

[CMA INTER SY08, J14, 6 Marks] Question 12: On 1st April, 2010, M/s. N. R. Sons & Co. purchased four machines for ₹2,60,000 each. On 1st April, 2011, one machine was sold for ₹2,05,000. On 1st July, 2012, the second machine was destroyed by fire and insurance claim received ₹1,75,000 on 15th July,2012. A new machine costing ₹ 4,50,000 was purchased on 1st October, 2012. Books are closed on 31st March every year and depreciation has been charged @15% per annum on diminishing balance method. You are required to prepare machinery account for 4 years till 31st March, 2014. (Calculations to be shown in nearest rupee) Answer: Dr

Machinery Account

Date

Particular

01.04.10

To

Bank A/c

₹

Date

10,40,000

31.03.11

Cr ₹

Particular By

31.03.11

Depreciation A/c

1,56,000

Balance c/d

8,84,000

10,40,000 01.04.11

Balance b/d

8,84,000

10,40,000 01.04.11

Bank a/c (machinery sold)

2,05,000

31.03.12

Depreciation

99,450

31.03.12

P& L A/c (Loss on sale)

16,000

Balance c/d

5,63,550

8,84,000 01.04.12

01.10.12

Balance b/d

Bank

5,63,550

4,50,000

8,84,000 01.07.12

Insurance claim

1,75,000

P&L A/c (Loss on destroy)

5,806

Depreciation A/c

7,044

31.03.13

Depreciation A/c

90,106

31.03.13

Balance c/d

7,35,595

10,13,550 01.04.13

Balance b/d

7,35,595

10,13,550 31.03.14

Depreciation

1,10,339

31.03.14

Balance c/d

6,25,256

7,35,595 01.04.14

Balance b/d

7,35,595

6,25,256

Workings Particulars

M-1

M- 2

M-3

M- 4

01.04.2010 Purchased of Machinery

2,60,000

2,60,000

2,60,000

2,60,000

Financial Accounting

M- 5 -

4.31

Less

Less

Depreciation@15% p. a

39,000

39,000

39,000

39,000

-

W.D.V. on 31.03.11

2,21,000

2,21,000

2,21,000

2,21,000

-

Sold of machinery on 01.04.11

2,05,000

-

-

-

-

16,000

-

-

-

-

-

33,150

33,150

33,150

-

1,87,850

1,87,850

1,87,850

-

7,044

-

-

-

1,80,806

1,87,850

1,87,850

Loss on Sale Less

Depreciation @ 15% P.a. W. D. V. on 31.03.12

Less

Depreciation @ 15% for 3 months i.e. 01.04.12-

-

01.07.12

Less

Amount recd from Insurance claim

1,75,000

Loss on fire

5,806

On 10.10.12 Purchased of machinery Less

Less

4,50,000

Depreciation of 2 machines for full years

28,177

1,59,672

1,59,673

-

-

33,750

1,59,672

1,59,673

4,16,250

23,951

23,950

62,438

1,35,721

1,35,723

3,53,812

Depreciation for 6th months of new machinery W.D.V. for 31.03.13

Less

28,178

Depreciation for full year @ 15% p.a.

[CMA INTER J10, 5 Marks] Question 13: From the following information prepare. 1.

Fixed Assets Account and

2.

Accumulated Depreciation Account : Opening Balance ₹ Closing Balance ₹ Fixed Assets Accumulated Depreciation

4,00,000

5,50,000

80,000

1,35,000

Additional Information: A part of a machine costing ₹60,000 has been sold for ₹30,000 on which accumulated depreciation was ₹15,000.

Accounting for Depreciation

4.32

Answer: Dr To

Fixed Assets A/c Balance b/d

4,00,000

Bank A/c

2,10,000

By

Cr

Accu. Depreciation

15,000

Bank A/c

30,000

Loss on sale of Asset

15,000

Balance c/d 6,10,000

Dr To

6,10,000

Accumulated Depreciation A/c Fixed Assets A/c Balance c/c

15,000

5,50,000

By

1,35,000

Cr

Balance b/d

80,000

Profit and Loss A/c

70,000

1,50,000

1,50,000

CHANGE IN METHODS OF DEPRECIATION AND ESTIMATION

Question 14: Change In Estimated Useful Life: Plant has useful life of 10 years. Depreciable amount is ₹40 lakhs. The company has charged SLM depreciation. At the end of 6 th year, the balance useful life was re-estimated at 8 years. What is the depreciation will be charged from 7 th year? Answer: =

=2

Question 15: A plant was depreciated under two different methods as under:SLM

WDVM

I year

3.90

10.69

II year

3.90

7.90

III year

3.90

5.84

IV year

3.90

4.32

15.60

28.75

3.90

3.19

V year Required: 1.

If the company followed WDV for first four years and decides to switch over to SLM, what would be the amount of resultant surplus/deficiency?

Financial Accounting

4.33

2.

It the company followed SLM for first four years and decides to switch over to WDV, what would be amount of resultant surplus/deficiency?

Answer: The change should be treated as a change in accounting policy and its effects should be quantified and disclosed. The effect 1.

Surplus of ₹13.15 will be written back to profit and loss account.

2.

Deficiency of ₹13.15 should be charged to profit and loss account.

[CMA FOUNDATION J02, 16 Marks] Question 16: Depreciation has been charged for the years 1998 to 2001 at 10% on reducing balance method on opening balance of each item of plant and machinery in use. The balance of Plant and Machinery Account on 31st December, 2001 was ₹54,000. There were no sales during these years and purchases were ₹16,800 on September, 1998 and ₹11,400 in December 2000. The management decided that depreciation should be charged at 20% on the same method but calculate on the closing balance of each year with retrospective effect from 1998. You are required to pass journal entry for giving effect to the revised basis at the end of 2001, and prepare Plant and Machinery Account and Revised Plant and Machinery Account for all the years. Answer: The Balance of Plant & Machinery accounts as on January 1998 is not given. This balance is to be ascertained by working reversed way from 2001, by following original rate of depreciation i.e. 10% WDV. Plant & Machinery Account

01.01.98 Sept

To

Particulars

Amount

Balance b/d

48,000

Bank

16,800

Particulars 31.12.98

By

Depreciation (

31.12.98

Balance b/d

60,000

4,800

₹60,000 – ₹16,800)

Balance c/d

64,800 01.01.99

Amount

60,000 64,800

31.12.99

Depreciation

6,000

(1/9 of 54,000) 31.12.99

Balance c/d

60,000 01.01.00

Balance b/d

54,000

Dec

Bank A/c

11,400

65,400

Accounting for Depreciation

54,000 60,000

31.12.00

Depreciation

31.12.00

Balance c/d

5,400

60,000 65,400

4.34

01.01.01

Balance b/d

60,000

31.12.01

Depreciation (

31.12.01

Balance c/d

₹54,000)

6,000 54,000

60,000

60,000

When depreciation is calculated on the revised basis, the Plant & Machinery Account will be as under:

Revised Plant & Machinery

01.01.98

To

Sept

Particulars

Amount

Balance b/d

48,000

Bank

16,800

Particulars 31.12.98

By

Amount

Depreciation

12,960

(20% on 64,800) Balance c/d

51,840

64,800 01.01.99

Balance b/d

51,840

64,800 31.12.99

Depreciation

10,368

(20% on 51,840) Balance c/d

41,472

51,840 01.01.00

Balance b/d

41,472

Dec

Bank A/c

11,400

51,840 31.12.00

Depreciation

10,574

(20% on 52,872) Balance c/d

42,298

52,872 01.01.01

Balance b/d

42,298

52,872 31.12.01

Depreciation

8,460

(20% on ₹42,298) Balance c/d

33,838

42,298

42,298

The resultant impact on Profit and Loss A/c of ₹20,162 to be disclosed in notes to accounts Depreciation

Residual

Depreciation

Residual

@ 10%

Value

@ 20%

Value

31.12.01

6,000

54,000

8,460

33,838

31.12.00

5,400

60,000

10,574

42,298

31.12.00

---

65,400

--

--

Financial Accounting

4.35

31.12.99

6,000

54,000

10,368

41,472

31.12.98

4,800

60,000

12,960

51,840

31.12.98

--

64,800

--

--

01.01.98

--

48,000

--

--

22,200

42,362

Difference (42,362 – 22,200) ₹20,162

Journal Entry 31.12.01

Depreciation A/c

Dr

2,460

Prior Period Adjustment A/c (Depreciation for Previous years)

Dr

17,702

To Plant & Machinery A/c

20,162

[Being arrear provision of Depreciation chargeable at the revised rate of 20% and charged @ 10% for the year 1998 to 2000 (₹33, 902 – ₹16,200) and for the year 2001 (₹8,460 - ₹6,000) charged]

Accounting for Depreciation

4.36