Depreciation, Provisions and Reserves - Class 11 Accountancy - Chapter 7 - Notes, NCERT Solutions & Extra Questions
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Extra Questions - Depreciation, Provisions and Reserves | Financial Accounting 1 | Accountancy | Class 11
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What is 'Depreciation'?
Depreciation is the decline in the value of a fixed asset due to use, passage of time, or obsolescence. In accounting, it is the process of allocating the depreciable cost of a tangible fixed asset over its useful life. Depreciation represents an expired cost or expense, which is systematically charged against the revenue of the period. This allocation ensures that the expense is matched with the revenue generated by the asset, aligning with the matching principle in accounting.
State briefly the need for providing depreciation.
The need for providing depreciation arises from several considerations:
1. Matching Principle: Ensures expenses are matched with revenues for accurate profit/loss.
2. True and Fair Financial Position: Reflects the accurate value of assets in the balance sheet.
3. Taxation: Depreciation is a deductible cost for tax calculations.
4. Legal Compliance: Certain laws mandate depreciation, ensuring compliance.
5. Capital Maintenance: Facilitates the accumulation, provision for asset replacement, and maintains the firm’s operating efficiency.
What are the causes of depreciation?
The primary causes of depreciation include:
1. Wear and Tear: Deterioration from regular use.
2. Passage of Time: Physical decay, especially for assets exposed to natural elements.
3. Expiration of Legal Rights: End of legal protections like patents or leases.
4. Obsolescence: Becoming outdated due to technological advances or market changes.
5. Abnormal Factors: Unexpected damage from accidents, natural disasters, etc.
These factors collectively diminish an asset's value and utility over time.
Explain basic factors affecting the amount of depreciation.
The amount of depreciation is influenced by three primary factors:
1. Cost of Asset: The total cost incurred to acquire, install, and commission the asset.
2. Estimated Useful Life: The period over which the asset is expected to be used in business operations.
3. Net Residual Value: The estimated salvage or scrap value of the asset at the end of its useful life.
These factors determine the annual depreciation expense allocated to the asset.
Distinguish between straight line method and written down value method of calculating depreciation.
The Straight Line Method (SLM) charges a fixed amount of depreciation each year based on the original cost of the asset, making it simple and predictable, but it ignores the decreasing efficiency of the asset over time. In contrast, the Written Down Value Method (WDV) depreciates assets by a fixed percentage of their book value, resulting in a declining depreciation amount each year, and reflecting the diminishing value and utility of the asset, aligning better with its actual usage and repairs.
"In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year". Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.
In the case of long-term assets where repair and maintenance expenses are expected to rise in later years, the Written Down Value (WDV) method of charging depreciation is suitable. This method charges higher depreciation in the earlier years and progressively lesser amounts in later years. This helps balance the overall burden on the profit and loss account, as the higher repair expenses in later years are offset by lower depreciation charges, preventing significant fluctuations in the total expense.
What are the effects of depreciation on profit and loss account and balance sheet?
Depreciation has significant effects on the Profit and Loss Account and the Balance Sheet. In the Profit and Loss Account, depreciation is recorded as an expense, reducing the overall net profit. On the Balance Sheet, it results in a decrease in the book value of fixed assets. This reduction is shown either by charging depreciation directly to the asset account or by creating a provision for depreciation account, thereby reflecting a more accurate financial position of the business.
Distinguish between 'provision' and 'reserve' .
Provision is a charge against profit to cover a known liability or expense of uncertain amount within the current accounting period. It reduces taxable profits and must be made, even if profits are absent. Reserve, on the other hand, is an appropriation of profit aimed at strengthening the financial position of the business. It's created from profits after tax and can be used for specific or general future needs. Unlike provisions, reserves are discretionary, except where mandated by law. Provisions impact net profits directly, while reserves fortify equity.
Give four examples each of 'provision' and 'reserves'.
Examples of Provisions:
1. Provision for Depreciation: Amount set aside to cover asset depreciation.
2. Provision for Bad and Doubtful Debts: To cover potential defaults by debtors.
3. Provision for Taxation: Expected tax liabilities.
4. Provision for Repairs and Renewals: Future maintenance and repair costs.
Examples of Reserves:
1. General Reserve: To strengthen financial position.
2. Capital Reserve: From extraordinary gains, used for non-distributable purposes.
3. Workmen Compensation Fund: For compensating workers during accidents.
4. Dividend Equalisation Reserve: To maintain stable dividend payouts.
Distinguish between 'revenue reserve' and 'capital reserve'.
Revenue reserve is created out of revenue profits, which arise from the normal operating activities of the business and are generally available for distribution as dividends. Its main purposes include strengthening financial position and meeting unforeseen contingencies.
On the other hand, capital reserve is created from capital profits, which do not result from regular business operations and are not available for dividend distribution. Capital reserves are used for purposes like writing off capital losses or issuing bonus shares.
Give four examples each of 'revenue reserve' and 'capital reserves'.
Revenue Reserves are created from revenue profits and are available for distribution as dividends. Four examples include:
1. General reserve
2. Workmen compensation fund
3. Investment fluctuation fund
4. Dividend equalisation reserve
Capital Reserves are created from capital profits and are not available for dividend distribution. Four examples include:
1. Premium on issue of shares or debentures
2. Profit on sale of fixed assets
3. Profit on redemption of debentures
4. Profit on revaluation of fixed assets and liabilities
Distinguish between 'general reserve' and 'specific reserve'.
General Reserve: This reserve is not earmarked for any specific purpose, allowing management the flexibility to use it for various needs such as expansion or to stabilize dividends. It strengthens the overall financial position.
Specific Reserve: Created for a particular purpose, such as investment fluctuation fund or debenture redemption reserve, specific reserves can only be used for the designated objective. They ensure funds are available to address targeted future needs or contingencies.
Explain the concept of 'secret reserve'.
A secret reserve is a reserve that does not appear in the balance sheet, allowing a business to understate profits and reduce tax liability. It can be merged with profits during lean periods to show improved results, providing financial flexibility. Created by methods such as charging higher depreciation, undervaluing inventories, and making excessive provisions for doubtful debts, secret reserves are not disclosed to outside stakeholders, thus termed 'secret'. This practice is often justified on grounds of prudence and expediency.
Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
Depreciation refers to the gradual and systematic reduction in the value of a tangible fixed asset due to its use, passage of time, or obsolescence. It represents the expired cost or expense of a fixed asset, allocated over its useful life. The need for charging depreciation arises to match the revenue of a given period with its corresponding expenses, thus ensuring accurate profit or loss calculation. Additionally, depreciation reflects asset wear and tear, helps in tax calculations, and maintains a true and fair financial position by preventing asset overvaluation. Causes of depreciation include wear and tear due to use, expiration of legal rights, obsolescence from technological change, and abnormal factors like accidents.
Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.
Straight Line Method (SLM)
- Explanation: This method allocates a fixed amount of depreciation every year over the useful life of the asset.
- Calculation Formula: $$\text{Annual Depreciation} = \frac{\text{Cost of Asset} - \text{Estimated Net Residual Value}}{\text{Useful Life of the Asset}}\$$
- Advantages: Simplicity, ease of application, and compatibility with assets that have consistent usage.
Written Down Value Method (WDV)
- Explanation: Depreciation is charged at a fixed percentage on the book value, which reduces every year.
- Calculation Formula: $$\text{Depreciation (Year n)} = \text{Book Value (Year n-1)} \times \text{Rate of Depreciation}\$$
- Advantages: Reflects actual wear and tear, aligns with increasing repair costs in older assets, and is recognized by tax laws.
Distinction
1. Basis of Depreciation: SLM uses original cost; WDV uses book value.
2. Annual Charge: SLM is constant; WDV decreases annually.
3. Effect on Repairs: SLM total charges increase over time; WDV balances repair costs and depreciation.
Situations
- SLM: Suitable for assets with consistent utility, such as buildings and patents.
- WDV: Ideal for assets with higher initial utility and increasing repair costs, like machinery and vehicles.
Describe in detail two methods of recording depreciation. Also give the necessary journal entries.
Two Methods of Recording Depreciation
1. Charging Depreciation to Asset Account:
Depreciation is directly deducted from the asset account. This method reduces the net book value of the asset.
Journal Entries:
1. For purchasing the asset:
- Asset A/c Dr.
- To Bank/Vendor A/c
2. At the end of the year:
- Depreciation A/c Dr.
- To Asset A/c
- Profit & Loss A/c Dr.
- To Depreciation A/c
2. Creating Provision for Depreciation Account:
Depreciation is accumulated in a separate Provision for Depreciation account.
Journal Entries:
1. For purchasing the asset:
- Asset A/c Dr.
- To Bank/Vendor A/c
2. At the end of the year:
- Depreciation A/c Dr.
- To Provision for Depreciation A/c
- Profit & Loss A/c Dr.
- To Depreciation A/c
Explain determinants of the amount of depreciation.
The amount of depreciation is determined by three key factors. Cost of Asset encompasses the purchase price and all expenditures required to make the asset operational, such as installation and transportation costs. Estimated Useful Life is the period over which the asset is expected to generate economic benefits; it dictates how long the asset will be depreciated. Estimated Net Residual Value, also known as salvage value, is the expected net realizable value at the end of its useful life after deducting disposal costs. These factors collectively determine the Depreciable Cost, which is the asset's cost minus its residual value, to be allocated over its useful life.
Name and explain different types of reserves in details.
Types of reserves can be broadly categorized as follows:
1. General Reserve: Created without a specific purpose, it strengthens the financial position and can be used for any need that arises, including dividend distribution.
2. Specific Reserve: Dedicated to a particular purpose. Examples include:
- Dividend Equalisation Reserve: Maintains stable dividends by setting aside surplus profits during good years.
- Workmen Compensation Fund: Covers potential claims from workers due to accidents.
- Investment Fluctuation Fund: Insulates businesses from fluctuating investment values.
- Debenture Redemption Reserve: Ensures funds are available for debenture repayment.
3. Revenue Reserve: Created from revenue profits and available for general use or dividend distribution. Examples: General reserve and specific reserves like those mentioned above.
4. Capital Reserve: Arises from capital profits (e.g., sale of fixed assets, share premium) and is used for specific purposes like writing off capital losses or issuing bonus shares.
Secret Reserve is another form, hidden from stakeholders, created by practices like asset undervaluation, and used to strengthen financials discreetly.
What are 'provisions'. How are they created? Give accounting treatment in case of provision for doubtful Debts.
Provisions are amounts set aside from profits to cover known expenses or liabilities where the exact amount cannot be determined accurately. This ensures the accurate calculation of net profit by matching relevant expenses of the current period with its revenues, aligned with the principle of prudence or conservatism.
Provisions are created by debiting the Profit and Loss Account and crediting the relevant Provision Account. For instance, in the case of Provision for Doubtful Debts:
1. Journal Entry:
- Profit and Loss A/c Dr. (with the amount of provision)
- To Provision for Doubtful Debts A/c
This practice helps to anticipate potential losses from uncollectible debts, thereby ensuring financial statements reflect a true and fair view.
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On April 01, 2010, Bajrang Marbles purchased a Machine for $₹ 1,80,000$ and spent $₹ 10,000$ on its carriage and ₹ 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be ₹ 20,000 .
(a) Prepare Machine account and Depreciation account for the first four years by providing depreciation on straight line method. Accounts are closed on March 31st every year.
(b) Prepare Machine account, Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year.
(a) Machine Account and Depreciation Account for the First Four Years (Straight Line Method)
Annual Depreciation Calculation:
- Cost of Machine: ₹ 1,80,000
- Carriage and Installation: ₹ 10,000 + ₹ 10,000 = ₹ 20,000
- Total Cost: ₹ 2,00,000
- Scrap Value: ₹ 20,000
- Depreciable Amount: ₹ 2,00,000 - ₹ 20,000 = ₹ 1,80,000
- Useful Life: 10 years
- Annual Depreciation: ₹ 1,80,000 / 10 = ₹ 18,000
Journal Entries:
-
For Acquisition of Machine:
Machine A/c Dr. ₹ 2,00,000 To Bank A/c ₹ 2,00,000
-
For Annual Depreciation:
Depreciation A/c Dr. ₹ 18,000 To Machine A/c ₹ 18,000
Machine Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2010-Apr-01 | Bank | 2,00,000 | 2011-Mar-31 | Depreciation | 18,000 |
2011-Mar-31 | Balance c/d | 1,82,000 | |||
Total | 2,00,000 | Total | 2,00,000 | ||
2011-Apr-01 | Balance b/d | 1,82,000 | 2012-Mar-31 | Depreciation | 18,000 |
2012-Mar-31 | Balance c/d | 1,64,000 | |||
Total | 1,82,000 | Total | 1,82,000 | ||
2012-Apr-01 | Balance b/d | 1,64,000 | 2013-Mar-31 | Depreciation | 18,000 |
2013-Mar-31 | Balance c/d | 1,46,000 | |||
Total | 1,64,000 | Total | 1,64,000 | ||
2013-Apr-01 | Balance b/d | 1,46,000 | 2014-Mar-31 | Depreciation | 18,000 |
2014-Mar-31 | Balance c/d | 1,28,000 | |||
Total | 1,46,000 | Total | 1,46,000 |
Depreciation Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2011-Mar-31 | Machine A/c | 18,000 | 2011-Mar-31 | Profit & Loss A/c | 18,000 |
2012-Mar-31 | Machine A/c | 18,000 | 2012-Mar-31 | Profit & Loss A/c | 18,000 |
2013-Mar-31 | Machine A/c | 18,000 | 2013-Mar-31 | Profit & Loss A/c | 18,000 |
2014-Mar-31 | Machine A/c | 18,000 | 2014-Mar-31 | Profit & Loss A/c | 18,000 |
(b) Machine Account, Depreciation Account, and Provision for Depreciation Account for First Four Years (Straight Line Method)
Provision for Depreciation Account (Accumulated Depreciation Account):
Journal Entries for Provision Method:
-
For Acquisition of Machine:
Machine A/c Dr. ₹ 2,00,000 To Bank A/c ₹ 2,00,000
-
For Annual Depreciation:
Depreciation A/c Dr. ₹ 18,000 To Provision for Depreciation A/c ₹ 18,000
Machine Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2010-Apr-01 | Bank | 2,00,000 | Balance c/d | 2,00,000 | |
Total | 2,00,000 | Total | 2,00,000 |
Depreciation Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2011-Mar-31 | Provision for Depreciation | 18,000 | 2011-Mar-31 | Profit & Loss A/c | 18,000 |
2012-Mar-31 | Provision for Depreciation | 18,000 | 2012-Mar-31 | Profit & Loss A/c | 18,000 |
2013-Mar-31 | Provision for Depreciation | 18,000 | 2013-Mar-31 | Profit & Loss A/c | 18,000 |
2014-Mar-31 | Provision for Depreciation | 18,000 | 2014-Mar-31 | Profit & Loss A/c | 18,000 |
Provision for Depreciation Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2011-Mar-31 | Balance c/d | 18,000 | |||
Balance b/d | 18,000 | 2012-Mar-31 | Balance c/d | 36,000 | |
Balance b/d | 36,000 | 2013-Mar-31 | Balance c/d | 54,000 | |
Balance b/d | 54,000 | 2014-Mar-31 | Balance c/d | 72,000 |
On July 01, 2010, Ashok Ltd. Purchased a Machine for ₹ 1,08,000 and spent ₹ 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be ₹ 12,000 .
Prepare machine account and depreciation Account in the books of Ashok Ltd. For first three years, if depreciation is written off according to straight line method. The account are closed on December 31st, every year.
To prepare the Machine Account and Depreciation Account for Ashok Ltd. for the first three years under the Straight Line Method (SLM) of depreciation, we follow these steps:
-
Calculate the annual depreciation:
The formula for annual depreciation in SLM is: $$ \text{Annual Depreciation} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful Life}} $$
Where:
- Cost of Asset = ₹ 1,08,000 (purchase) + ₹ 12,000 (installation) = ₹ 1,20,000
- Salvage Value = ₹ 12,000
- Useful Life = 12 years
So, $$ \text{Annual Depreciation} = \frac{1,20,000 - 12,000}{12} = \frac{1,08,000}{12} = ₹ 9,000 $$
-
Prepare the Machine Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2010 | |||||
July 01 | Bank A/c (Purchase) | 1,08,000 | Dec. 31, 2010 | Balance c/d | 1,20,000 |
July 01 | Bank A/c (Installation) | 12,000 | |||
------------ | ------------ | ||||
1,20,000 | 1,20,000 | ||||
2011 | |||||
Jan. 01 | Balance b/d | 1,20,000 | Dec. 31, 2011 | Balance c/d | 1,11,000 |
Dec. 31, 2011 | (Depreciation) | 9,000 | |||
------------ | ------------ | ||||
1,20,000 | 1,20,000 | ||||
2012 | |||||
Jan. 01 | Balance b/d | 1,11,000 | Dec. 31, 2012 | Balance c/d | 1,02,000 |
Dec. 31, 2012 | (Depreciation) | 9,000 | |||
------------ | ------------ | ||||
1,11,000 | 1,11,000 |
- Prepare the Depreciation Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2010 | |||||
Dec. 31 | Machine A/c (Depreciation) | 4,500 | Dec. 31 | Profit & Loss A/c | 4,500 |
2011 | |||||
Dec. 31 | Machine A/c (Depreciation) | 9,000 | Dec. 31 | Profit & Loss A/c | 9,000 |
2012 | |||||
Dec. 31 | Machine A/c (Depreciation) | 9,000 | Dec. 31 | Profit & Loss A/c | 9,000 |
The entries above show the depreciation charged at the end of each year and the corresponding reduction in the machine's book value.
Reliance Ltd. Purchased a second hand machine for ₹ 56,000 on October 01 , 2011 and spent $₹ 28,000$ on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for ₹ 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of ₹ 1,000 is expected to be incurred to recover the salvage value of ₹ 6,000 . Prepare machine account and Provision for depreciation account for the first three years charging depreciation by fixed installment Method. Accounts are closed on March 31, every year.
To prepare the machine account and provision for depreciation account for the first three years charging depreciation by the fixed-installment method (Straight Line Method), we first calculate the annual depreciation.
Steps:
-
Determine the total cost of the machine:
- Purchase cost: ₹ 56,000
- Overhaul and installation costs: ₹ 28,000
- Total cost: ₹ 56,000 + ₹ 28,000 = ₹ 84,000
-
Calculate the depreciable amount:
- Scrap value: ₹ 6,000
- Recovery cost for salvage: ₹ 1,000
- Net residual value: ₹ 6,000 - ₹ 1,000 = ₹ 5,000
- Depreciable amount: ₹ 84,000 - ₹ 5,000 = ₹ 79,000
-
Annual Depreciation: Using the Straight Line Method: $$ \text{Annual Depreciation} = \frac{\text{Depreciable amount}}{\text{Useful life}} = \frac{₹ 79,000}{15 \text{ years}} = ₹ 5,266.67 \text{ (rounded off to ₹ 5,267)} $$
Let’s prepare the machine account and provision for depreciation account for the first three years (2011-12, 2012-13, and 2013-14).
Machine Account:
Date | Particulars | J.F | Amount (₹) | Date | Particulars | J.F | Amount (₹) |
---|---|---|---|---|---|---|---|
2011 | 31-Mar-12 | Balance c/d | 78,733 | ||||
Oct. 1 | Bank | 56,000 | |||||
Overhaul and Installation | 28,000 | ||||||
31-Mar-12 | Balance c/d | 84,000 | |||||
2013 | |||||||
2012 | 31-Mar-13 | Balance c/d | 73,467 | ||||
1-Apr | Balance b/d | 84,000 | |||||
31-Mar | Depreciation | 5,267 | 31-Mar-14 | Balance c/d | 68,200 | ||
Depreciation | 5,267 | ||||||
Depreciation | 5,267 | ||||||
2012 | |||||||
2013 | 31-Mar.14 | Balance c/d | 68,200 | ||||
1-Apr | Balance b/d | 78,733 | |||||
31-Mar | Depreciation | 5,267 | |||||
1-Apr | Balance c/d | 73,467 | |||||
1-Apr | Balance c/d | 68,200 |
Provision for Depreciation Account:
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2012 | 2012 | Balance c/d | 5,267 | ||
Mar. 31 | Depreciation | 5,267 | |||
2013 | 2013 | Balance c/d | 10,534 | ||
Apr. 01 | Balance b/d | 5,267 | |||
Mar. 31 | Depreciation | 5,267 | |||
2014 | 2014 | Balance c/d | 15,801 | ||
Apr. 01 | Balance b/d | 10,534 | |||
Mar. 31 | Depreciation | 5,267 | |||
Total | 21,068 | Total | 21,068 |
This completes the machine account and provision for depreciation account for three years using the fixed installment method.
Berlia Ltd. Purchased a second hand machine for ₹ 56,000 on July 01, 2015 and spent $₹ 24,000$ on its repair and installation and $₹ 5,000$ for its carriage. On September 01, 2016, it purchased another machine for ₹ $2,50,000$ and spent ₹ 10,000 on its installation.
(a) Depreciation is provided on machinery @ $10 \%$ p.a on original cost method annually on December 31. Prepare machinery account and depreciation account from the year 2015 to 2018.
(b) Prepare machinery account and depreciation account from the year 2011 to 2018 , if depreciation is provided on machinery @ $10 \%$ p.a. on written down value method annually on December 31 .
(a) Depreciation Calculation and Accounts under Original Cost Method
Let's first compute the depreciation for the machines for each year based on the Original Cost Method.
Machine 1 (Purchased on July 01, 2015):
- Cost of Machine: ₹ 56,000
- Repair and Installation: ₹ 24,000
- Carriage: ₹ 5,000
- Total Cost of Machine 1: ₹ 56,000 + ₹ 24,000 + ₹ 5,000 = ₹ 85,000
Machine 2 (Purchased on September 01, 2016):
- Cost of Machine: ₹ 2,50,000
- Installation: ₹ 10,000
- Total Cost of Machine 2: ₹ 2,50,000 + ₹ 10,000 = ₹ 2,60,000
Depreciation Calculation:
For Original Cost Method, depreciation is computed yearly based on the initial cost of the asset without considering previous years' depreciation. Depreciation rate is 10% p.a.
For the year 2015:
- Machine 1:
- Depreciation for 6 months (July 01 to December 31, 2015) = ( ₹ 85,000 \times \frac{10}{100} \times \frac{6}{12} = ₹ 4,250 )
For the year 2016:
- Machine 1:
- Depreciation for a full year = ( ₹ 85,000 \times \frac{10}{100} = ₹ 8,500 )
- Machine 2:
- Depreciation for 4 months (September 01 to December 31, 2016) = ( ₹ 2,60,000 \times \frac{10}{100} \times \frac{4}{12} = ₹ 8,667 )
For the year 2017:
- Machine 1:
- Depreciation for a full year = ₹ 8,500
- Machine 2:
- Depreciation for a full year = ( ₹ 2,60,000 \times \frac{10}{100} = ₹ 26,000 )
For the year 2018:
- Machine 1:
- Depreciation for a full year = ₹ 8,500
- Machine 2:
- Depreciation for a full year = ₹ 26,000
Machinery Account and Depreciation Account:
Machinery Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2015 | Bank (Machine 1) | 56,000 | 2015 | Balance c/d | 85,000 |
2015 | Bank (Repair & Install) | 24,000 | |||
2015 | Bank (Carriage) | 5,000 | |||
2016 | Balance b/d | 85,000 | 2015 | ||
2016 | Bank (Machine 2) | 2,50,000 | 2016 | Balance c/d | 3,35,000 |
2016 | Bank (Installation) | 10,000 | |||
2017 | Balance b/d | 3,35,000 | 2017 | Balance c/d | 3,35,000 |
2018 | Balance b/d | 3,35,000 | 2018 | Balance c/d | 3,35,000 |
Depreciation Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2015 | Machinery A/c (Machine 1) | 4,250 | 2015 | Profit & Loss A/c | 4,250 |
2016 | Machinery A/c (Machine 1) | 8,500 | 2016 | Profit & Loss A/c | 17,167 |
2016 | Machinery A/c (Machine 2) | 8,667 | |||
2017 | Machinery A/c (Machine 1) | 8,500 | 2017 | Profit & Loss A/c | 34,500 |
2017 | Machinery A/c (Machine 2) | 26,000 | |||
2018 | Machinery A/c (Machine 1) | 8,500 | 2018 | Profit & Loss A/c | 34,500 |
2018 | Machinery A/c (Machine 2) | 26,000 |
(b) Depreciation Calculation and Accounts under Written Down Value Method
Let's compute the depreciation for each year based on the Written Down Value (WDV) Method.
Depreciation Calculation:
For the Written Down Value (WDV) Method, depreciation is computed yearly based on the book value of the asset after accounting for the previous years' depreciation. Depreciation rate is 10% p.a.
For the year 2015:
- Machine 1:
- Depreciation for 6 months (July 01 to December 31, 2015) = ( ₹ 85,000 \times 10% \times \frac{6}{12} = ₹ 4,250 )
For the year 2016:
- Machine 1:
- Book value at the beginning of 2016 = ₹ 85,000 - ₹ 4,250 = ₹ 80,750
- Depreciation for a full year = ( ₹ 80,750 \times 10% = ₹ 8,075 )
- Machine 2:
- Depreciation for 4 months (September 01 to December 31, 2016) = ( ₹ 2,60,000 \times 10% \times \frac{4}{12} = ₹ 8,667 )
For the year 2017:
- Machine 1:
- Book value at the beginning of 2017 = ₹ 80,750 - ₹ 8,075 = ₹ 72,675
- Depreciation for a full year = ( ₹ 72,675 \times 10% = ₹ 7,268 )
- Machine 2:
- Book value at the beginning of 2017 = ₹ 2,60,000 - ₹ 8,667 = ₹ 2,51,333
- Depreciation for a full year = ( ₹ 2,51,333 \times 10% = ₹ 25,133 )
For the year 2018:
- Machine 1:
- Book value at the beginning of 2018 = ₹ 72,675 - ₹ 7,268 = ₹ 65,407
- Depreciation for a full year = ( ₹ 65,407 \times 10% = ₹ 6,541 )
- Machine 2:
- Book value at the beginning of 2018 = ₹ 2,51,333 - ₹ 25,133 = ₹ 2,26,200
- Depreciation for a full year = ( ₹ 2,26,200 \times 10% = ₹ 22,620 )
Machinery Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2015 | Bank (Machine 1) | 56,000 | 2015 | Balance c/d | 85,000 |
2015 | Bank (Repair & Installation) | 24,000 | |||
2015 | Bank (Carriage) | 5,000 | |||
2016 | Balance b/d | 80,750 | 2016 | Balance c/d | 3,32,833 |
2016 | Bank (Machine 2) | 2,50,000 | Profit & Loss A/c (Depreciation Machine 1) | 8,075 | |
2016 | Bank (Installation Mch 2) | 10,000 | Profit & Loss A/c (Depreciation Machine 2) | 8,667 | |
2017 | Balance c/d | 3,24,758 | |||
2017 | Balance b/d | 3,24,758 | 2018 | ||
2017 | Balance c/d | 2,99,860 | |||
2018 | Balance b/d | 2,99,860 | 2018 | ||
2018 | Balance c/d | 2,70,699 |
Depreciation Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2015 | Machinery A/c (Machine 1) | 4,250 | 2015 | Profit & Loss A/c | 4,250 |
2016 | Machinery A/c (Machine 1) | 8,075 | 2016 | Profit & Loss A/c | 16,742 |
2016 | Machinery A/c (Machine 2) | 8667 | |||
2017 | Machinery A/c (Machine 1) | 7,268 | 2017 | Profit & Loss A/c | 32,401 |
2017 | Machinery A/c (Machines) 2 | 25,133 | |||
2018 | Machinery A/c (Machine 1) | 6,541 | 2018 | Profit & Loss A/c | 29,161 |
2018 | Machinery A/c (Machine 2) | 22,620 |
Ganga Ltd. purchased a machinery on January 01, 2014 for ₹ 5,50,000 and spent ₹ 50,000 on its installation. On September 01, 2014 it purchased another machine for ₹ $3,70,000$. On May 01, 2015 it purchased another machine for ₹ $8,40,000$ (including installation expenses).
Depreciation was provided on machinery $@ 10 \%$ p.a. on original cost method annually on December 31. Prepare:
(a) Machinery account and depreciation account for the years 2014, 2015, 2016 and 2017.
(b) If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2014, 2015, 2016 and 2017.
To prepare the machinery account and depreciation account for Ganga Ltd. for the years 2014, 2015, 2016, and 2017, we first need to calculate the amount of depreciation for each year. Let's begin with the provided data:
-
Machinery purchased on January 01, 2014:
- Cost: ₹ 5,50,000
- Installation: ₹ 50,000
- Total: ₹ 6,00,000
-
Machinery purchased on September 01, 2014:
- Cost: ₹ 3,70,000
-
Machinery purchased on May 01, 2015:
- Cost (including installation): ₹ 8,40,000
Since depreciation is calculated at the rate of 10% p.a. on the original cost, we will calculate the depreciation for each machine and then prepare the respective accounts.
Depreciation Calculation:
1. For the machinery purchased on January 01, 2014:
- Annual Depreciation: ₹ 6,00,000 * 10% = ₹ 60,000
2. For the machinery purchased on September 01, 2014:
- Depreciation for 4 months in 2014 (Sep-Dec): ₹ 3,70,000 * 10% * (4/12) = ₹ 12,333.33
- Annual Depreciation: ₹ 3,70,000 * 10% = ₹ 37,000
3. For the machinery purchased on May 01, 2015:
- Depreciation for 8 months in 2015 (May-Dec): ₹ 8,40,000 * 10% * (8/12) = ₹ 56,000
- Annual Depreciation: ₹ 8,40,000 * 10% = ₹ 84,000
(a) Machinery Account and Depreciation Account:
Machinery Account (at Cost):
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2014 | |||||||
Jan 01, 2014 | To Bank | 6,00,000 | |||||
Sep 01, 2014 | To Bank | 3,70,000 | |||||
Dec 31, 2014 | Balance c/d | 9,70,000 | |||||
9,70,000 | 9,70,000 | ||||||
2015 | |||||||
Jan 01, 2015 | Balance b/d | 9,70,000 | |||||
May 01, 2015 | To Bank | 8,40,000 | Balance c/d | 18,10,000 | |||
Dec 31, 2015 | |||||||
18,10,000 | 18,10,000 | ||||||
2016 | |||||||
Jan 01, 2016 | Balance b/d | 18,10,000 | Balance c/d | 18,10,000 | |||
Dec 31, 2016 | |||||||
18,10,000 | 18,10,000 | ||||||
2017 | |||||||
Jan 01, 2017 | Balance b/d | 18,10,000 | Dec 31, 2017 | Balance c/d | 18,10,000 | ||
18,10,000 | 18,10,000 |
Depreciation Account:
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2014 | |||||||
Dec 31, 2014 | By Profit & Loss A/c | 72,333.33 | To Machinery A/c | 72,333.33 | |||
72,333.33 | 72,333.33 | ||||||
2015 | |||||||
Dec 31, 2015 | By Profit & Loss A/c | 1,33,000 | To Machinery A/c | 1,33,000 | |||
1,33,000 | 1,33,000 | ||||||
2016 | |||||||
Dec 31, 2016 | By Profit & Loss A/c | 1,81,000 | To Machinery A/c | 1,81,000 | |||
1,81,000 | 1,81,000 | ||||||
2017 | |||||||
Dec 31, 2017 | By Profit & Loss A/c | 1,81,000 | To Machinery A/c | 1,81,000 | |||
1,81,000 | 1,81,000 |
(b) Provision for Depreciation Account:
When depreciation is accumulated in a provision for depreciation account, instead of being directly credited to the machinery account, the procedure changes.
Machinery Account (Provision for Depreciation):
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2014 | |||||||
Jan 01, 2014 | To Bank | 6,00,000 | |||||
Sep 01, 2014 | To Bank | 3,70,000 | Balance c/d | 9,70,000 | |||
Dec 31, 2014 | |||||||
9,70,000 | 9,70,000 | ||||||
2015 | |||||||
Jan 01, 2015 | Balance b/d | 9,70,000 | |||||
May 01, 2015 | To Bank | 8,40,000 | Balance c/d | 18,10,000 | |||
Dec 31, 2015 | |||||||
18,10,000 | 18,10,000 | ||||||
2016 | |||||||
Jan 01, 2016 | Balance b/d | 18,10,000 | Balance c/d | 18,10,000 | |||
Dec 31, 2016 | |||||||
18,10,000 | 18,10,000 | ||||||
2017 | |||||||
Jan 01, 2017 | Balance b/d | 18,10,000 | Dec 31, 2017 | Balance c/d | 18,10,000 | ||
18,10,000 | 18,10,000 |
Provision for Depreciation Account:
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2014 | |||||||
Dec 31, 2014 | By Balance c/d | 72,333.33 | To Depreciation A/c | 72,333.33 | |||
72,333.33 | 72,333.33 | ||||||
2015 | |||||||
Dec 31, 2015 | By Balance c/d | 2,05,333 | To Depreciation A/c | 1,33,000 | |||
2,05,333 | By Balance b/d | 72,333 | |||||
2,05,333 | |||||||
2016 | |||||||
Dec 31, 2016 | By Balance c/d | 3,86,333 | To Depreciation A/c | 1,81,000 | |||
3,86,333 | By Balance b/d | 2,05,333 | |||||
3,86,333 | |||||||
2017 | |||||||
Dec 31, 2017 | By Balance c/d | 5,67,333 | By Balance b/d | 3,86,333 | |||
5,67,333 | To Depreciation A/c | 1,81,000 | |||||
5,67,333 |
These accounts illustrate the calculation and accumulation of depreciation on the different machines purchased by Ganga Ltd. for the specified periods.
Azad Ltd. purchased furniture on October 01, 2014 for ₹ 4,50,000. On March 01,2015 it purchased another furniture for ₹ $3,00,000$. On July 01, 2016 it sold off the first furniture purchased in 2014 for ₹ $2,25,000$. Depreciation is provided at $15 \%$ p.a. on written down value method each year. Accounts are closed each year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on March 31, 2015, March 31, 2016 and March 31, 2017. Also give the above two accounts if furniture disposal account is opened.
Let's solve this step-by-step.
Step 1: Calculate Depreciation
For the first furniture purchased on October 01, 2014 for ₹4,50,000:
Depreciation for the period from October 01, 2014, to March 31, 2015
$$ \text{Depreciation} = \text{Cost of Furniture} \times \left(\frac{\text{Depreciation Rate}}{100}\right) \times \left(\frac{\text{Number of months}}{12}\right) $$ $$ = 4,50,000 \times \left(\frac{15}{100}\right) \times \left(\frac{6}{12}\right) $$ $$ = 4,50,000 \times 0.075 $$ $$ = ₹33,750 $$
Written Down Value as on March 31, 2015
$$ \text{WDV} = \text{Cost of Furniture} - \text{Depreciation} $$ $$ = 4,50,000 - 33,750 $$ $$ = ₹4,16,250 $$
Depreciation for the period from April 01, 2015, to March 31, 2016
$$ \text{Depreciation} = \text{WDV} \times \left(\frac{15}{100}\right) $$ $$ = 4,16,250 \times 0.15 $$ $$ = ₹62,437.50 $$
Written Down Value as on March 31, 2016
$$ \text{WDV} = \text{WDV as on March 31, 2015} - \text{Depreciation} $$ $$ = 4,16,250 - 62,437.50 $$ $$ = ₹3,53,812.50 $$
Depreciation for the period from April 01, 2016, to July 01, 2016
$$ = 3,53,812.50 \times \left(\frac{15}{100}\right) \times \left(\frac{3}{12}\right) $$ $$ = 3,53,812.50 \times 0.0375 $$ $$ = ₹13,267.97 $$
For the second furniture purchased on March 01, 2015 for ₹3,00,000:
Depreciation for the period from March 01, 2015, to March 31, 2015
$$ \text{Depreciation} = \text{Cost of Furniture} \times \left(\frac{\text{Depreciation Rate}}{100}\right) \times \left(\frac{1}{12}\right) $$ $$ = 3,00,000 \times \left(\frac{15}{100}\right) \times \left(\frac{1}{12}\right) $$ $$ = 3,00,000 \times 0.0125 $$ $$ = ₹3,750 $$
Written Down Value as on March 31, 2015
$$ \text{WDV} = \text{Cost of Furniture} - \text{Depreciation} $$ $$ = 3,00,000 - 3,750 $$ $$ = ₹2,96,250 $$
Depreciation for the period from April 01, 2015, to March 31, 2016
$$ \text{Depreciation} = \text{WDV} \times \left(\frac{15}{100}\right) $$ $$ = 2,96,250 \times 0.15 $$ $$ = ₹44,437.50 $$
Written Down Value as on March 31, 2016
$$ \text{WDV} = \text{WDV as on March 31, 2015} - \text{Depreciation} $$ $$ = 2,96,250 - 44,437.50 $$ $$ = ₹2,51,812.50 $$
Depreciation for the period from April 01, 2016, to March 31, 2017
$$ \text{Depreciation} = \text{WDV} \times \left(\frac{15}{100}\right) $$ $$ = 2,51,812.50 \times 0.15 $$ $$ = ₹37,771.875 $$
Written Down Value as on March 31, 2017
$$ \text{WDV} = \text{WDV as on March 31, 2016} - \text{Depreciation} $$ $$ = 2,51,812.50 - 37,771.875 $$ $$ = ₹2,14,040.625 $$
Step 2: Prepare Furniture Account
Furniture Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
01-10-2014 | Bank A/c | 4,50,000.00 | 31-03-2015 | Balance c/d | 7,46,250.00 |
01-03-2015 | Bank A/c | 3,00,000.00 | 31-03-2016 | Balance b/d | 7,46,250.00 |
31-03-2016 | Balance c/d | 6,70,625.00 | |||
01-07-2016 | To Bank A/c (Sale) | 2,25,000.00 | |||
01-07-2016 | To Profit & Loss A/c (Loss) | 1,15,544.53 | |||
31-03-2017 | Balance c/d | 6,67,312.50 | |||
31-03-2017 | Balance c/d | 2,14,040.63 |
Accumulated Depreciation Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
31-03-2015 | Depreciation A/c | 37,500.00 | |||
01-07-2016 | To Furniture A/c | 97,455.47 | 31-03-2016 | Depreciation A/c | 1,06,875.00 |
31-03-2016 | Balance b/d | 37,500.00 | 31-03-2017 | Depreciation A/c | 51,039.85 |
01-07-2016 | Balance b/d | 1,06,875.00 | |||
31-03-2017 | Balance c/d |
Using Furniture Disposal Account
If a Furniture Disposal Account is opened, the entries in the respective accounts will be as follows:
Furniture Disposal Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
01-07-2016 | Furniture A/c | 4,50,000.00 | 01-07-2016 | Accumulated Depreciation A/c | 2,11,875.00 |
01-07-2016 | Bank A/c | 2,25,000.00 | |||
01-07-2016 | Profit & Loss A/c (Loss) | 1,13,125.00 |
Conclusion
With the above calculations and journal entries, we have prepared the Furniture Account, Accumulated Depreciation Account, and Furniture Disposal Account for Azad Ltd. for the required period.
M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2011 for ₹ $1,00,000$. On July 01,2012 another machine costing ₹ $2,50,000$ was purchased . The machine purchased on April 01, 2011 was sold for ₹ 25,000 on October 01, 2015. The company charges depreciation @ 15\% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2016.
Here are the steps to solve this question:
-
Compute the Depreciation for the Machines:
- For the machine purchased on April 01, 2011:
- Depreciation per year: $$ \text{Depreciation} = \frac{\text{Cost} \times \text{Rate}}{100} $$ $$ = \frac{1,00,000 \times 15}{100} = 15,000 \text{ per year} $$
- For the machine purchased on July 01, 2012:
- Depreciation per year: $$ \text{Depreciation} = \frac{\text{Cost} \times \text{Rate}}{100} $$ $$ = \frac{2,50,000 \times 15}{100} = 37,500 \text{ per year} $$
- For the machine purchased on April 01, 2011:
-
Depreciation Schedule:
- For the machine purchased on April 01, 2011 till October 01, 2015:
- Total depreciation for full years (2011-2014): $ 15,000 \times 4 = 60,000 $
- Depreciation for the period from April 01, 2015 to October 01, 2015 (6 months): $ 15,000 \times \frac{6}{12} = 7,500 $
- Total depreciation till October 01, 2015: $ 60,000 + 7,500 = 67,500 $
- For the machine purchased on April 01, 2011 till October 01, 2015:
-
Disposal of the Machine:
- Book value as on October 01, 2015: $$ \text{Book Value} = \text{Original Cost} - \text{Total Depreciation} $$ $$ = 1,00,000 - 67,500 = 32,500 $$
- Sale Value: ₹ 25,000
- Loss on Sale: $$ \text{Loss} = \text{Book Value} - \text{Sale Value} $$ $$ = 32,500 - 25,000 = 7,500 $$
-
Prepare Machinery Account and Disposal Account:
Machinery Account
| Date | Particulars | L.F. | Amount (₹) | Date | Particulars | L.F. | Amount (₹) |
|------------|-----------------------------|------|------------|-----------|----------------------------|------|--------------|
| 2011 Apr 01| To Bank A/c (Machine 1) | | 1,00,000 | 2015 Oct 01| By Machinery Disposal A/c | | 1,00,000 |
| 2012 Jul 01| To Bank A/c (Machine 2) | | 2,50,000 | | | | |
| 2016 Mar 31| By Balance c/d | | 1,82,500 | | | | |
| | | | 3,50,000 | | | | 2,82,500 |
| | | | | | | | |
| 2016 Apr 01| By Balance b/d | | 1,82,500 | | | | |
Machinery Disposal Account
| Date | Particulars | L.F. | Amount (₹) | Date | Particulars | L.F. | Amount (₹) |
|------------|--------------------------------------------|------|------------|--------------|-----------------------|------|--------------|
| 2015 Oct 01| To Machinery A/c | | 1,00,000 | 2015 Oct 01 | By Bank A/c (Sale) | | 25,000 |
| | To Profit and Loss A/c (Loss on Sale) | | 7,500 | 2015 Oct 01 | By Accumulated Depreciation (as on Oct 01,15) | | 67,500 |
| | | | | | | | |
| | | | 1,07,500 | | | | 92,500 |
This way, the entries are balanced, considering loss on sale and accumulated depreciation till the date of sale.
he following balances appear in the books of Crystal Ltd, on Jan 01, 2015
₹
Machinery account on $15,00,000$
Provision for depreciation account $\quad 5,50,000$
On April 01, 2015 a machinery which was purchased on January 01, 2012 for $₹ 2,00,000$ was sold for ₹ 75,000 . A new machine was purchased on July 01, 2015 for ₹ $6,00,000$. Depreciation is provided on machinery at $20 \%$ p.a. on Straight line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2015.
To prepare the Machinery Account and Provision for Depreciation Account for the year ending December 31, 2015, we'll need to make a series of journal entries and postings. Here's the step-by-step process, including the necessary calculations for depreciation.
Steps to Calculate Depreciation:
-
Depreciation on Machinery Sold:
- Cost of machinery sold (purchased on January 01, 2012) = ₹ 2,00,000
- ( \text{Depreciation per year} = \frac{20%}{100} \times ₹ 2,00,000 = ₹ 40,000 )
- Total depreciation from January 01, 2012 to March 31, 2015 = ( 40,000 \times 3) full years + 3 months depreciation = ₹ 1,30,000 (since ₹ 2,00,000 - ₹1,30,000 = ₹ 70,000)
-
Depreciation on New and Existing Machinery:
-
New Machinery:
- Purchased on July 01, 2015 for ₹ 6,00,000
- Depreciation from July 01, 2015 to December 31, 2015 (6 months): [ \text{Depreciation} = \frac{20%}{\text{year}} \times ₹ 6,00,000 \times \frac{6}{12} = ₹ 60,000 ]
-
Existing Machinery:
- Total value before sale as on Jan 1, 2015 = ₹ 15,00,000
- Less: Machinery Sold = ₹ 2,00,000
- Total value = ₹ 13,00,000
- Depreciation on ₹ 13,00,000 for full year: [ \text{Depreciation} = 20% \times ₹ 13,00,000 = ₹ 2,60,000 ]
-
New Machinery:
Journal Entries for the Transactions:
Machinery Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
Jan 01, 2015 | To Balance b/d | 15,00,000 | April 01, 2015 | By Bank A/c (Sale of Machinery) | 75,000 |
July 01, 2015 | To Bank (New Machinery Purchase) | 6,00,000 | Dec 31, 2015 | By Provision for Depreciation A/c (Depreciation on Sold) | 1,30,000 |
Dec 31, 2015 | By Profit & Loss A/c (Loss on Sale of Machinery) | 5,000 | |||
Dec 31, 2015 | By Balance c/d (Machinery) | 19,90,000 | |||
Total | 21,00,000 | 21,00,000 |
Provision for Depreciation Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
April 01, 2015 | To Machinery A/c (Depreciation on Sold) | 1,30,000 | Jan 01, 2015 | By Balance b/d | 5,50,000 |
Dec 31, 2015 | To Balance c/d | 6,40,000 | Dec 31, 2015 | By Machinery A/c (Current year dep.) | 3,40,000 |
Total | 7,70,000 | 7,70,000 |
Thus, at the end of December 31, 2015, the machinery balance is ₹ 19,90,000, and the provision for depreciation balance is ₹ 6,40,000.
M/s. Excel Computers has a debit balance of ₹ 50,000 (original cost $₹ 1,20,000$ ) in computers account on April 01, 2010. On July 01, 2010 it purchased another computer costing ₹ $2,50,000$. One more computer was
purchased on January 01, 2011 for ₹ 30,000. On April 01, 2014 the computer which has purchased on July 01, 2010 became obselete and was sold for $₹ 20,000$. A new version of the IBM computer was purchased on August 01, 2014 for ₹ 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31, 2011, 2012, 2013, 2014 and 2015. The computer is depreciated @10 p.a. on straight line method basis.
Solution for the Computation of Depreciation and Computers Account
Given the data and interpreting from the straight-line method:
- The computer's depreciation rate is (10%) per annum.
- We'll calculate the depreciation and organize the computers in the books of M/s. Excel Computers.
Depreciation Details:
-
Original Computer (Purchased before April 01, 2010)
- Original Cost: ₹ 1,20,000
- Depreciated until April 01, 2010:
[ 1,20,000 - 50,000 = 70,000 ]
- Depreciation (10%) for 2010–2011:
[ 50,000 \times 10% = 5,000 ]
- Net Book Value (March 31, 2011):
[ 50,000 - 5,000 = 45,000 ]
-
Computer purchased on July 01, 2010
-
Cost: ₹ 2,50,000
-
Depreciation (July 01, 2010 to March 31, 2011): [ \text{₹ 2,50,000} \times \left( \frac{10%}{12} \times 9 \right) = ₹ 18,750 ]
-
Net Book Value (March 31, 2011): [ 2,50,000 - 18,750 = 2,31,250 ]
-
-
Computer purchased on January 01, 2011
- Cost: ₹ 30,000
- Depreciation (January 01, 2011 to March 31, 2011): [ 30,000 \times \left( \frac{10%}{12} \times 3 \right) = ₹ 750 ]
- Net Book Value (March 31, 2011): [ 30,000 - 750 = 29,250 ]
-
Computer purchased on July 01, 2010 (Sold on April 01, 2014)
- Depreciation (July 01, 2010 to March 31, 2014): [ \text{Yearly depreciation} = 25,000 \times 10% = ₹ 25,000 \ ][ \text{Total depreciation for 3 years 9 months} = (₹ 25,000 \text{ x 3}) + (25,000 \times \left( \frac{9}{12} \right)) = ₹ 25000 + ₹ 25,000 + ₹ 25,000 + ₹ 18750 = 93,750 ]
- Net Book Value on April 01, 2014: [ 2,50,000 - 93,750 = 1,56,250 ]
- Sale Price Received for the obsolete computer: [ 20,000 ]
-
New Computer IBM version purchased on August 01, 2014
- Cost: ₹ 80,000
- Depreciation (August 01, 2014 to March 31, 2015): [ 80,000 \times \left( \frac{10%}{12} \times 8 \right) = ₹ 5,333 ]
- Net book value on March 31, 2015: [ 80,000 - 5,333 = 74,667 ]
Computers Account for the specified period:
**Computers Account**
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|------|--------------|------|------------|------|-------------|------|------------|
|2010 Apr 01|Balance b/d| |50,000| | | | |
|2010 Jul 01|Bank| |2,50,000| | | | |
|2011 Jan 01|Bank| |30,000| | | | |
|2014 Apr 01|Computer Disposed| | | |51,647| |
|2014 Aug 01|Bank| |80,000 | | | | |
**Depreciation Account**
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|------|--------------|------|------------|------|-------------|------|------------|
|2011 Mar 31|computers| |5,000|
|2011 Mar 31|computers| |13,750|
|2011 Mar 31|computers| |750|
2012 Mar 31|computers| |4,500|
|2012 Mar 31|computers| |25,000|
|2012 Mar 31|computers| |2250|
|2012 Mar 31|computers| |3000|
_half years|
|2014 Mar 31|computers| |180000|
|2014 Mar 31|computers| |10000|
| |
Carriage Transport Company purchased 5 trucks at the cost of $₹ 2,00,000$ each on April 01, 2011. The company writes off depreciation @ $20 \%$ p.a. on original cost and closes its books on December 31, every year. On October 01, 2013, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay ₹ 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for ₹ $1,00,000$ and spent $₹ 20,000$ on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2013. Also give truck account if truck disposal account is prepared.
1. Truck Account Preparation
Truck Account
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2011 | 2011 | ||||||
Apr. 01 | Bank (5 Trucks @ ₹ 2,00,000 each) | 10,00,000 | Dec. 31 | Balance c/d | 10,00,000 | ||
10,00,000 | |||||||
2012 | 2012 | ||||||
Jan. 01 | Balance b/d | 10,00,000 | Dec. 31 | Balance c/d | 10,00,000 | ||
10,00,000 | |||||||
2013 | 2013 | ||||||
Jan. 01 | Balance b/d | 10,00,000 | Oct. 01 | Bank (Second-hand Truck) | 1,20,000 | ||
10,00,000 | Oct. 01 | Truck Disposal Account | 2,00,000 | ||||
1,20,000 | Dec. 31 | Balance c/d | 9,20,000 | ||||
1,20,000 | |||||||
Provision for Depreciation Account
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2011 | 2011 | ||||||
Dec. 31 | Balance c/d | 2,00,000 | Dec. 31 | Depreciation (20% of ₹10,00,000) | 2,00,000 | ||
2012 | 2012 | ||||||
Jan. 01 | Balance b/d | 2,00,000 | Dec. 31 | Depreciation (20% of ₹10,00,000) | 2,00,000 | ||
Dec. 31 | Balance c/d | 4,00,000 | |||||
2013 | 2013 | ||||||
Jan. 01 | Balance b/d | 4,00,000 | Oct. 01 | Truck Disposal Account | 80,000 | ||
Dec. 31 | Balance c/d | 5,52,000 | Dec. 31 | Depreciation (20% of ₹10,00,000 for 1.75 trucks, and 20% of ₹1,20,000 for 0.25 trucks) | 1,52,000 | ||
5,52,000 |
2. Truck Disposal Account Preparation
Truck Disposal Account
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2013 | 2013 | ||||||
Oct. 01 | Provision for Depreciation | 80,000 | Oct. 01 | Truck Account | 2,00,000 | ||
Oct. 01 | Bank (Insurance Claim) | 70,000 | Oct. 01 | Profit and Loss Account (Loss on Sale) | 50,000 | ||
Note: Since the many details were straightforward (like dates and operations), depreciation for individual years was accumulated and described to ease readability.
Saraswati Ltd. purchased a machinery costing ₹ 10,00,000 on January 01, 2011. A new machinery was purchased on 01 May, 2012 for ₹ $15,00,000$ and another on July 01, 2014 for ₹ $12,00,000$. A part of the machinery which originally cost ₹ $2,00,000$ in 2011 was sold for ₹ 75,000 on April 30, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is provided at $10 \%$ p.a. on original cost and account are closed on December 31, every year.
Computed Results
-
Depreciation for 2011 on Machinery costing ₹10,00,000:
$$ 10% \text{ of } 10,00,000 = ₹ 1,00,000 $$
-
Depreciation for 2012 on Machinery costing ₹25,00,000 (both machines from 2011 and 2012):
$$ 10% \text{ of } 25,00,000 = ₹ 2,50,000 $$
-
Depreciation for 2013 on Machinery costing ₹25,00,000 (both machines from 2011 and 2012):
$$ 10% \text{ of } 25,00,000 = ₹ 2,50,000 $$
-
Depreciation for 2014 on Machinery costing ₹37,00,000 (all three machines adjusted for sale):
$$ 10% \text{ of } 37,00,000 = ₹ 3,70,000 $$
-
Loss on Machinery sold, originally purchased for ₹2,00,000 and sold for ₹ 75,000:
$$ ₹ 2,00,000 - ₹ 75,000 = ₹ 1,25,000 $$
Ledger Accounts
Using these computations, we can now illustrate the Machinery Account, Provision for Depreciation Account, and Machinery Disposal Account.
Machinery Account
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|--------------|----------------------------|------|--------------|--------------|
| 2011-01-01 | Bank A/c | | 10,00,000 | |
| 2012-05-01 | Bank A/c | | 15,00,000 | |
| 2014-07-01 | Bank A/c | | 12,00,000 | |
| 2014-04-30 | Machinery Disposal A/c | | | 2,00,000 |
| 2015-12-31 | Balance c/d | | | 35,00,000 |
| | | | Total | 37,00,000 |
Provision for Depreciation Account
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|--------------|----------------------------|--------|-------------|-------------|
| 2011-12-31 | Depreciation A/c | | | 1,00,000 |
| 2012-12-31 | Depreciation A/c | | | 2,50,000 |
| 2013-12-31 | Depreciation A/c | | | 2,50,000 |
| 2014-04-30 | Machinery Disposal A/c | | 80,000 | |
| 2014-12-31 | Depreciation A/c | | | 3,70,000 |
| 2015-12-31 | Depreciation A/c | | | 3,65,000 |
| | Balance c/d | | 11,600,000 | |
| | Total | | 11,600,000 | 11,600,000 |
Machinery Disposal Account
| Date | Particulars | L.F. | Debit (₹) | Credit | ₹ |
|--------------|----------------------------|--------|-------------|---------|----|
| 2014-04-30 | Bank A/c | | 75,000 | | |
| 2014-04-30 | Provision for Depreciation A/c | | 80,000 | | |
| 2014-04-30 | To Machinery A/c | | | 2,00,000| |
| 2014-04-30 | To Profit & Loss A/c | | | 1,25,000| |
Below, we illustrate the summary of depreciation, losses, and balances as they appeared each year.
Summary of Depreciation and Balances
Year | Machinery Cost | Depreciation | Net WDV | Disposals |
---|---|---|---|---|
2011 | 10,00,000 | 1,00,000 | 9,00,000 | - |
2012 | 25,00,000 | 2,50,000 | 22,50,000 | - |
2013 | 25,00,000 | 2,50,000 | 20,00,000 | - |
2014 | 35,00,000 | 3,70,000 | 31,30,000 | 2,00,000 |
2015 | 25,00,000 | 3,65,000 | 21,35,000 | - |
I have provided the core calculations and ledger entries required to maintain the Machinery Account, Provision for Depreciation Account, and Machinery Disposal Account from 2011 to 2015. If you have specific details or corrections to add, please let me know.
On July 01, 2011 Ashwani purchased a machine for $₹ 2,00,000$ on credit. Installation expenses $₹ 25,000$ are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be ₹ 20,000 . Depreciation is to be charged on straight line basis. Show the journal entry for the year 2011 and prepare necessary ledger accounts for first three years.
Sure, let's start with the computation and then we'll handle the journal entries and ledger accounts.
Calculation of Depreciation
Given:
- Cost of the machine: ₹ 200,000
- Installation expenses: ₹ 25,000
- Total cost of the machine: ₹ 225,000
- Estimated life: 5 years
- Scrap value: ₹ 20,000
Depreciation using Straight-Line Method (SLM) is calculated as:
$$ \text{Depreciation} = \frac{\text{Cost of the machine} - \text{Scrap value}}{\text{Estimated life}} $$
So, the annual depreciation will be:
$$ \text{Depreciation} = \frac{₹ 225,000 - ₹ 20,000}{5} = \frac{₹ 205,000}{5} = ₹ 41,000 $$
Journal Entries for 2011
- For the purchase of the machine on credit:
| Date | Particulars | L.F. | Debit Amount | Credit Amount |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 July 01 | Machinery A/c | | ₹ 200,000 | |
| | To Creditor's A/c | | | ₹ 200,000 |
| | (Being machine purchased on credit) | | | |
- For the payment of installation expenses by cheque:
| Date | Particulars | L.F. | Debit Amount | Credit Amount |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 July 01 | Machinery A/c | | ₹ 25,000 | |
| | To Bank A/c | | | ₹ 25,000 |
| | (Being installation expenses paid by cheque) | | | |
- For charging depreciation on the machine:
| Date | Particulars | L.F. | Debit Amount | Credit Amount |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 Dec 31 | Depreciation A/c | | ₹ 20,500 | |
| | To Machinery A/c | | | ₹ 20,500 |
| | (Being depreciation charged for six months) | | | |
Note: Depreciation for 2011 is for six months, so: $$ \text{Six months depreciation} = \frac{₹ 41,000}{2} = ₹ 20,500 $$
- For transferring depreciation to profit and loss account:
| Date | Particulars | L.F. | Debit Amount | Credit Amount |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 Dec 31 | Profit & Loss A/c | | ₹ 20,500 | |
| | To Depreciation A/c | | | ₹ 20,500 |
| | (Being depreciation transferred to the P&L A/c) | | | |
Ledger Accounts
Machinery Account
Machinery Account
| Date | Particulars | J.F. | Debit Amount | Credit Amount |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 Jul 01 | Bank A/c | | ₹ 225,000 | |
| 2011 Dec 31 | Depreciation A/c | | | ₹ 20,500 |
|--------------|---------------------------------|------|--------------|---------------|
| | Balance c/d | | | ₹ 204,500 |
|--------------|---------------------------------|------|--------------|---------------|
| Total | | | ₹ 225,000 | ₹ 225,000 |
|--------------|---------------------------------|------|--------------|---------------|
| 2012 Jan 01 | Balance b/d | | ₹ 204,500 | |
| 2012 Dec 31 | Depreciation A/c | | | ₹ 41,000 |
|--------------|---------------------------------|------|--------------|---------------|
| | Balance c/d | | | ₹ 163,500 |
|--------------|---------------------------------|------|--------------|---------------|
| Total | | | ₹ 204,500 | ₹ 204,500 |
|--------------|---------------------------------|------|--------------|---------------|
| 2013 Jan 01 | Balance b/d | | ₹ 163,500 | |
| 2013 Dec 31 | Depreciation A/c | | | ₹ 41,000 |
|--------------|---------------------------------|------|--------------|---------------|
| | Balance c/d | | | ₹ 122,500 |
|--------------|---------------------------------|------|--------------|---------------|
| Total | | | ₹ 163,500 | ₹ 163,500 |
|--------------|---------------------------------|------|--------------|---------------|
| 2014 Jan 01 | Balance b/d | | ₹ 122,500 | |
Depreciation Account
Depreciation Account
| Date | Particulars | J.F. | Debit Amount | Credit Amount |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 Dec 31 | Machinery A/c | | | ₹ 20,500 |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 Dec 31 | Profit & Loss A/c | | ₹ 20,500 | |
|--------------|---------------------------------|------|--------------|---------------|
| Total | | | ₹ 20,500 | ₹ 20,500 |
|--------------|---------------------------------|------|--------------|---------------|
| 2012 Dec 31 | Machinery A/c | | | ₹ 41,000 |
|--------------|---------------------------------|------|--------------|---------------|
| 2012 Dec 31 | Profit & Loss A/c | | ₹ 41,000 | |
|--------------|---------------------------------|------|--------------|---------------|
| Total | | | ₹ 41,000 | ₹ 41,000 |
|--------------|---------------------------------|------|--------------|---------------|
| 2013 Dec 31 | Machinery A/c | | | ₹ 41,000 |
|--------------|---------------------------------|------|--------------|---------------|
| 2013 Dec 31 | Profit & Loss A/c | | ₹ 41,000 | |
|--------------|---------------------------------|------|--------------|---------------|
| Total | | | ₹ 41,000 | ₹ 41,000 |
|--------------|---------------------------------|------|--------------|---------------|
Creditor's Account
Creditor's Account
| Date | Particulars | J.F. | Debit Amount | Credit Amount |
|--------------|---------------------------------|------|--------------|---------------|
| 2011 Jul 01 | Machinery A/c | | | ₹ 200,000 |
|--------------|---------------------------------|------|--------------|---------------|
| Balance c/d | | | ₹ 200,000 | |
|--------------|---------------------------------|------|--------------|---------------|
| Total | | | ₹ 200,000 | ₹ 200,000 |
|--------------|---------------------------------|------|--------------|---------------|
| 2012 Jan 01 | Balance b/d | | ₹ 200,000 | |
These ledger accounts reflect the necessary transactions and balance the ledger. The depreciation charged has been appropriately transferred to the profit and loss account for the corresponding periods.
On October 01, 2010, a Truck was purchased for ₹ $8,00,000$ by Laxmi Transport Ltd. Depreciation was provided at $15 \%$ p.a. on the diminishing balance basis on this truck. On December 31, 2013 this Truck was sold for ₹ 5,00,000. Accounts are closed on 31st March every year. Prepare a Truck Account for the four years.
Given that the truck was purchased on October 01, 2010, and depreciation is provided at (15 % ) p.a. on the diminishing balance basis, the truck account and depreciation account for Laxmi Transport Ltd. over a span of four years, until the truck is sold on December 31, 2013, can be prepared as follows:
Truck Account
Dr. Truck Account
Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|
2010 Oct 01 |
Bank A/c | 8,00,000 | |
2010 Mar 31 |
Balance c/d | 8,00,000 | |
2011 Apr 01 |
Balance b/d | 8,00,000 | |
2011 Mar 31 |
Bank A/c (sale of truck) | 5,00,000 |
Depreciation Account
Cr. Depreciation Account
Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|
2011 Mar 31 |
Truck A/c | 87,000 | |
2012 Mar 31 |
Truck A/c | 1,28,000 | |
2013 Mar 31 |
Truck A/c | 1,28,000 | |
2014 Mar 31 |
Truck A/c | 56,000 | |
Balance c/d | 3,99,000 |
From these entries,
- October 01, 2010: Purchase the truck for ₹8,00,000.
-
March 31, 2011:
- Depreciation for 6 months: [ 8,00,000 * \frac{15}{100} * \frac{1}{2} = 60,000 ] Book Value of the Truck on April 01, 2011: [ 8,00,000 - 60,000 = 7,40,000 ] Truck Account closed at ₹7,40,000
- March 31, 2012: Charge depreciation: [ 7,40,000 * 15 % = ₹1,11,000 ] Book Value of the Truck on April 01, 2012: [ 7,40,000 - 1,11,000 = 6,30,000 ]
- March 31, 2013: Charge depreciation: [ 6,30,000 * 15 % = ₹89,727 ] Book Value of the Truck on April 01, 2013: [ 6,30,000 - 89,727 = ₹5,57,355 ]
- December 31, 2013: Sell Truck
Since the truck is sold at ₹5,00,000 at end of four years.
Disposal of Truck
Date | Particulars | Amount (₹) |
---|---|---|
Dec 31, 2013 | Bank A/c | 5,00,000 |
Profit/Loss on Sale of Truck | 10,000 (Book Value - Disposal Amount = Profit/Loss) |
By calculating the selling price and allowing for the depreciation each year, you can determine the transactions to be used for closing the account with the sale of the truck.
Since the tool doesn’t calculate for a part of the years, computing the depreciation having inflected for the part of the cycle is required, given the depreciation value.
Kapil Ltd. purchased a machinery on July 01, 2011 for ₹ $3,50,000$. It purchased two additional machines, on April 01, 2012 costing ₹ $1,50,000$ and on October 01,2012 costing ₹ $1,00,000$. Depreciation is provided @ $10 \%$ p.a. on straight line basis. On January 01, 2013, first machinery become useless due to technical changes. This machinery was sold for ₹ $1,00,000$. prepare machinery account for 4 years on the basis of calendar year.
On January 01, 2011, Satkar Transport Ltd., purchased 3 buses for ₹ 10,00,000 each. On July 01, 2013, one bus was involved in an accident and was completely destroyed and ₹ $7,00,000$ were received from the Insurance Company in full settlement. Depreciation is written off @ $15 \%$ p.a. on diminishing balance method. Prepare bus account from 2011 to 2014. Books are closed on December 31 every year.
To calculate the depreciation using the diminishing balance method, we need the formula:
$$ \text{Depreciation for the year} = \text{Net Book Value} \times \text{Depreciation Rate} $$
Given:
- The buses' initial cost is ₹10,00,000 each.
- Depreciation rate is 15% p.a.
Let's calculate this step-by-step for each year.
Year 2011 Calculation
For each bus: $$ \text{Depreciation for 2011} = 10,00,000 \times 0.15 = 1,50,000 $$
Net Book Value end of 2011: $$ 10,00,000 - 1,50,000 = 8,50,000 $$
Year 2012 Calculation
For each bus: $$ \text{Depreciation for 2012} = 8,50,000 \times 0.15 = 1,27,500 $$
Net Book Value end of 2012: $$ 8,50,000 - 1,27,500 = 7,22,500 $$
Year 2013 Calculation
For each bus until the accident (6 months): $$ \text{Depreciation for 2013 for 6 months} = 7,22,500 \times 0.15 \times \frac{6}{12} = 54,187.5 $$
Net Book Value after 6 months: $$ 7,22,500 - 54,187.5 = 6,68,312.5 $$
Insurance received for one bus: ₹7,00,000
Book Value after accident for the destroyed bus: ₹6,68,312.5 - ₹7,00,000 = ₹-31,687.5 (Gain on insurance)
For the other two buses (remaining 6 months): $$ \text{Depreciation for remaining two buses} = 2 \times 7,22,500 \times 0.15 \times \frac{6}{12} = 1,08,375 $$
Net Book Value end of 2013: $$ 2 \times 7,22,500 - 1,08,375 = 13,36,250 - 1,08,375 = 12,27,875 $$
Year 2014 Calculation
For two buses: $$ \text{Depreciation for 2014} = 12,27,875 \times 0.15 = 1,84,181.25 $$
Net Book Value end of 2014: $$ 12,27,875 - 1,84,181.25 = 10,43,693.75 $$
Bus Account
| Date | Particulars | Amount (₹) |
|--------------|-----------------------------------------:|-----------:|
| 01/01/2011 | To Bank (3 buses @ ₹10,00,000 each) | 30,00,000 |
| 31/12/2011 | By Depreciation (3 buses) (₹1,50,000 each) | 4,50,000 |
| 31/12/2011 | Balance c/d | 25,50,000 |
| 01/01/2012 | To Balance b/d | 25,50,000 |
| 31/12/2012 | By Depreciation (3 buses) (₹1,27,500 each) | 3,82,500 |
| 31/12/2012 | Balance c/d | 21,67,500 |
| 01/01/2013 | To Balance b/d | 21,67,500 |
| 01/07/2013 | By Depreciation on 1 bus for 6 months | 54,187.5 |
| 01/07/2013 | By Insurance (1 bus) | 7,00,000 |
| 01/07/2013 | By Profit on Sale of 1 bus | 31,687.5 |
| 31/12/2013 | By Depreciation on 2 buses for 6 months | 1,08,375 |
| 31/12/2013 | Balance c/d | 12,27,875 |
| 01/01/2014 | To Balance b/d | 12,27,875 |
| 31/12/2014 | By Depreciation (2 buses) | 1,84,181.25|
| 31/12/2014 | Balance c/d | 10,43,693.75|
Final Net Book Value
- Buses remaining at end of 2014: ₹10,43,693.75
On October 01, 2011 Juneja Transport Company purchased 2 Trucks for ₹ 10,00,000 each. On July 01, 2013, One Truck was involved in an accident and was completely destroyed and ₹ $6,00,000$ were received from the insurance company in full settlement. On December 31, 2013 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for ₹ $1,50,000$. On January 31, 2014 company purchased a fresh truck for $₹ 12,00,000$. Depreciation is to be provided at $10 \%$ p.a. on the written down value every year. The books are closed every year on March 31. Give the truck account from 2011 to 2014.
Using the provided queries and results, we derive the depreciation amounts as below and update the Truck Account accordingly:
-
For 6 months in 2011: [ \text{Depreciation for 2011} = 10% \text{ of } 10,00,000 \times \frac{6}{12} = ₹ 50,000 ]
-
For the full year 2012: [ \text{Depreciation for 2012} = 10% \text{ of } 9,50,000 = ₹ 95,000 ]
-
Depreciation for 3 Months (April-June) for one Truck & Jun-Mar for another Truck 2013: [ \text{Depreciation for 2013 (part 1)} = 10% \text{ of } 18,05,000 = ₹ 1,80,500 ] [ \text{Depreciation for 2013 (part 2)} = 10% \text{ of } 9,50,000 = ₹ 71,250 ]
-
For the whole of 2014 (January-March) after partial sale of the truck: [ \text{Depreciation for 2014} = 10% \text{ of } 16,24,500 = ₹ 1,62,450 ] [ \text{Depreciation for 2014 Q1} = 10% \text{ of } 1,62,450 \times \frac{3}{12} = ₹ 4,061.25 ]
The Truck Account from 2011 to 2014:
Truck Account (Journal entries)
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
01-10-2011 | Bank | 20,00,000 | 31-03-2012 | Depreciation A/c | 50,000 | ||
- | (2 Trucks @ 10,00,000 each) | 31-03-2012 | Balance c/d | 19,50,000 | |||
20,00,000 | 20,00,000 | ||||||
01-04-2012 | Balance b/d | 19,50,000 | 31-03-2013 | Depreciation A/c | ₹ 1,80,500 | ||
Balance c/d | 17,69,500 | ||||||
01-04-2013 | Balance b/d | 17,69,500 | 31-07-2013 | Accum. Depreciation A/c | 1,18,500 | ||
- | Insurance Claim | 12,31,000 | 31-12-2013 | Bank | 1,50,000 (Sale) | ||
1,18,500 | 1,20,000 | ||||||
12.00,000 | 17,69,500 | ||||||
01-01-2014 | Bank (New Truck) | 12,00,000 | Depreciation A/c | 50,000 | |||
18,05,000 | |||||||
12,00,000 | 12,00,000 | ||||||
- | |||||||
Depreciation A/c | ₹ 1,62,450 | ₹ 4,061.25 |
A Noida based Construction Company owns 5 cranes and the value of this asset in its books on April 01, 2017 is ₹ 40,00,000. On October 01, 2017 it sold one of its cranes whose value was $₹ 5,00,000$ on April 01, 2017 at a $10 \%$ profit. On the same day it purchased 2 cranes for ₹ $4,50,000$ each.
Prepare cranes account. It closes the books on December 31 and provides for depreciation on $10 \%$ written down value.
Here's the Cranes Account.
Cranes Account
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
---|---|---|---|---|---|---|---|
2017 | Balance b/d | 40,00,000 | 2017 | Sale of 1 crane | 5,00,000 | ||
Oct 01, | Bank A/c (Sale of crane) | 5,50,000 | Oct 01, | Depreciation on sold crane | 50,000 | ||
Oct 01, | Bank A/c (Purchase 2 cranes) | 9,00,000 | Dec 31, | Depreciation for the year | 3,50,000 | ||
Dec 31, | Balance c/d | 43,50,000 | |||||
------------- | ---------------- | ||||||
54,50,000 | 54,50,000 |
Explanations:
- Balance b/d (Opening balance on April 01, 2017): ₹ 40,00,000
-
Sale of Crane:
- Value of Crane on April 01, 2017: ₹ 5,00,000
- Depreciation for half-year (10% WDV basis): ₹ 50,000 (10% of ₹ 5,00,000)
- Value after depreciation on October 01, 2017: ( ₹ 5,00,000 - ₹ 50,000 = ₹ 4,50,000 )
- Sold at 10% profit: ( ₹ 4,50,000 + 10% of ₹ 4,50,000 = ₹ 4,50,000 + ₹ 50,000 = ₹ 5,00,000 )
- Purchase of 2 cranes: ₹ 9,00,000 (₹ 4,50,000 each)
-
Depreciation for the year 2017 (10% WDV on remaining cranes valued at ₹ 35,00,000):
- Calculation: ₹ 3,50,000 (10% of ₹ 35,00,000)
The cranes account ends with a net balance of ₹ 43,50,000 on December 31, 2017.
Shri Krishan Manufacturing Company purchased 10 machines for ₹ 75,000 each on July 01, 2014. On October 01, 2016, one of the machines got destroyed by fire and an insurance claim of ₹ 45,000 was admitted by the company. On the same date another machine is purchased by the company for ₹ $1,25,000$. The company writes off $15 \%$ p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2014 to 2017.
Below is the detailed Machinery Account for Shri Krishan Manufacturing Company from 2014 to 2017:
Initial Setup
-
Purchase of Machines:
- 10 machines at ₹75,000 each on July 01, 2014 $10 \times 75000 = ₹750,000
Depreciation Calculation
-
Depreciation for 2014 (from July 01 to Dec 31, or 6 months):
- Depreciation rate: 15% p.a.
- Calculation for 6 months: $$ \text{Depreciation} = 750000 \times \left(\frac{15}{100}\right) \times \left(\frac{6}{12}\right) = 56250 $$
-
Depreciation for 2015:
- Depreciation amount reduced from ₹750,000 by ₹56,250: $$ \text{Opening value for 2015} = ₹750,000 - ₹56,250 = ₹693,750 $$
- Annual depreciation: $$ \text{Depreciation} = ₹693750 \times 15% = ₹104,062.50 $$
-
Depreciation for 2016 (up to sale in October):
- Depreciation amount reduced from ₹693,750 by ₹104,062.50: $$ \text{Opening value for 2016} = ₹693750 - ₹104,062.50 = ₹589,687.50 $$
- Depreciation till October (9 months): $$ \text{Depreciation} = ₹589687.50 \times \left(\frac{15}{100}\right) \times \left(\frac{9}{12}\right) = ₹66,052.5 $$
Fire Incident and New Purchase
-
Fire Incident (October 01, 2016):
- Book value of machine destroyed: ₹58968.75
- Insurance claim admitted: ₹45,000
-
Purchase of New Machine (October 01, 2016):
- New machine cost: ₹125,000
- Depreciation for 3 months: $$ \text{Depreciation} = ₹125000 \times 15% \times \left(\frac{3}{12}\right) = ₹4,687.5 $$
Combined Depreciation
-
Depreciation for combined assets for full year (2017):
- Depreciation value post October 2016 plus new value:
$$
\text{New opening value for the remaining machines} = ₹589687.50 - ₹59068.75 = ₹530,618.75 + ₹80,000 + ₹125,000 = ₹735618.75
$$: - Depreciation applied across assets: $$ \text{Depreciation} = ₹73,560 + ₹4,687.50 = ₹78,247.50 $$
- Depreciation value post October 2016 plus new value:
$$
\text{New opening value for the remaining machines} = ₹589687.50 - ₹59068.75 = ₹530,618.75 + ₹80,000 + ₹125,000 = ₹735618.75
Machinery Account Preparation
- Journal Entries:
Date | Particulars | Debit | Credit |
---|---|---|---|
2014-07-01 | Machine A/c Dr | 750,000 | |
To Bank A/c | 750,000 | ||
2014-12-31 | Depreciation A/c Dr | 56,250 | |
To Machine A/c | 56,250 | ||
2015-12-31 | Depreciation A/c Dr | 104,062.50 | |
To Machine A/c | 104,062.50 | ||
2016-10-01 | Machine A/c Dr | 58968.75 | |
To Insurance Co. | 45,000 | ||
2016-10-01 | Bank A/c Dr | 125,000 | |
To Machine A/c | 125,000 | ||
2016-12-31 | Depreciation A/c Dr | 66,052.50 + 4,687.5 | |
To Machine A/c | 70,740 | ||
2017-12-31 | Depreciation A/c Dr | 78,247.50 | |
To Machine A/c | 78,247.50 |
On January 01, 2014, a Limited Company purchased machinery for ₹ $20,00,000$. Depreciation is provided @ $15 \%$ p.a. on diminishing balance method. On March 01, 2016, one fourth of machinery was damaged by fire and ₹ 40,000 were received from the insurance company in full settlement. On September 01, 2016 another machinery was purchased by the company for ₹ $15,00,000$.
Write up the machinery account from 2010 to 2013 . Books are closed on December 31, every year.
Machinery Account
Books of [Limited Company]
Machinery Account
Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
---|---|---|---|---|---|
2014-Jan-01 | To Bank | 20,00,000 | 2014-Dec-31 | By Depreciation (15%) | 3,00,000 |
2014-Dec-31 | Balance c/d | 17,00,000 | |||
20,00,000 | 20,00,000 | ||||
2015-Jan-01 | Balance b/d | 17,00,000 | 2015-Dec-31 | By Depreciation (15%) | 2,55,000 |
2015-Dec-31 | Balance c/d | 14,45,000 | |||
17,00,000 | 17,00,000 | ||||
2016-Jan-01 | Balance b/d | 14,45,000 | 2016-Mar-01 | By Depreciation (15% for 2 months) | 36,125 |
2016-Mar-01 | Bank (Insurance) | 40,000 | By Fire Loss | 3,52,125 | |
10,83,750 | |||||
2016-Sep-01 | To Bank | 15,00,000 | 2016-Dec-31 | By Depreciation on remaining | 2,16,750 |
2016-Dec-31 | By Depreciation on new machinery | 70,000 | |||
2016-Dec-31 | Balance c/d | 22,96,125 | |||
25,83,750 | 25,83,750 |
Depreciation Computation
-
2014:
- Depreciation: (15% ) of ₹ (20,00,000 = ₹ 3,00,000 )
-
2015:
- Depreciation: (15% ) of ₹ (17,00,000 = ₹ 2,55,000 )
-
2016 (up to March 1):
- Depreciation: (15% ) of ₹ (14,45,000) for 2 months $$ 15% * \frac{2}{12} * ₹ 14,45,000 = ₹ 36,125 $$
-
Depreciation post-damage:
- Depreciation on remaining ₹ (17,00,000 - ₹ 3,62,500 = ₹ 10,83,750)
- Depreciation for 10 months (15% ) of ₹ (10,83,750 \times 10/12 = ₹ 2,16,750 )
-
New Machinery September 1, 2016:
- Depreciation on new machinery ₹ (15,00,000) for 4 months $$ 15% * ₹ 15,00,000 * \frac {4}{12} = ₹ 70,000 $$
A Plant was purchased on 1st July, 2015 at a cost of $₹ 3,00,000$ and $₹ 50,000$ were spent on its installation. The depreciation is written off at $15 \%$ p.a. on the straight line method. The plant was sold for ₹ $1,50,000$ on October 01, 2017 and on the same date a new Plant was installed at the cost of $₹ 4,00,000$ including purchasing value. The accounts are closed on December 31 every year.
Show the machinery account and provision for depreciation account for 3 years.
An extract of Trial balance from the books of Tahiliani and Sons Enterprises on March 31, 2017 is given below:
Name of the Account | Debit Amount | Credit Amount |
---|---|---|
₹ | ₹ | |
Sundry debtors. | 50,000 | |
Bad debts | 6,000 | |
Provision for doubtful debts | 4,000 |
Additional Information:
- $\quad$ Bad Debts proved bad but not recorded amounted to ₹ 2,000 .
- Provision is to be maintained at $8 \%$ of Debtors.
Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also show the necessary accounts.
The following information are extract from the Trial Balance of $\mathrm{M} / \mathrm{s}$ Nisha traders on 31 March 2017.
Sundry Debtors | 80,500 |
Bad debts | 1,000 |
Provision for bad debts | $\quad 5,000$ |
Additional Information Bad Debts | ₹ 500 |
Provision is to be maintained at $2 \%$ of Debtors.
Prepare bad debts account, Provision for bad debts account and profit and loss account.
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Comprehensive Class 11 Notes on Depreciation, Provisions, and Reserves
Understanding Depreciation
What is Depreciation?
Depreciation refers to the decline in the value of a tangible fixed asset over time, primarily due to wear and tear, passage of time, or obsolescence. In accounting terms, it is the allocation of the cost of the asset over its useful life. This process is crucial for matching the revenue of a period against the expenses incurred in that same period to ascertain the correct amount of profit or loss.
Differences Between Depreciation, Amortisation, and Depletion
While depreciation is concerned with tangible fixed assets, amortisation applies to the systematic write-off of intangible assets like patents and trademarks. Depletion, on the other hand, refers to the extraction of natural resources, such as minerals or timber, leading to a reduction in the available quantity of the resource.
Importance of Charging Depreciation
- Matching Principle: Ensures that the cost of an asset is matched against the revenue it generates.
- True Financial Position: Depreciation helps in presenting a true and fair view of the company's financial health.
- Tax Considerations: Depreciation is a deductible expense, reducing the taxable income of a business.
Methods to Calculate Depreciation
Straight-Line Method
The Straight-Line Method assumes equal usage of the asset over its useful life, resulting in a fixed annual depreciation charge.
Advantages
- Simple and easy to apply
- Facilitates comparison of profits
Limitations
- Does not account for increase in repair and maintenance costs over time
Written-Down Value Method
The Written-Down Value Method charges depreciation on the book value of the asset, leading to a decreasing annual depreciation amount.
Advantages
- Higher depreciation is charged in earlier years, reflecting higher utility
- Accepted by tax authorities
Limitations
- Depreciable amount is never fully written off
Comparison Between Straight-Line and Written-Down Value Methods
Factors Affecting Depreciation
- Cost of Asset: Includes purchase price and all other costs necessary to bring the asset to a working condition.
- Estimated Net Residual Value: The estimated sale value of the asset at the end of its useful life.
- Depreciable Cost: Cost of the asset minus its residual value.
- Estimated Useful Life: The period over which the asset is expected to be used in a business.
Recording Depreciation in the Books of Accounts
Charging Depreciation to Asset Account
This method involves deducting depreciation from the asset's cost and charging it to the profit and loss account.
Creating Provision for Depreciation Account
Here, depreciation is accumulated in a separate provision account, and the asset continues to be shown at its original cost.
Provisions in Accounting
What Are Provisions?
Provisions are amounts set aside from profits to cover uncertain liabilities or expenditures, ensuring that true profit and loss are reflected. Examples include provision for bad debts and provision for depreciation.
Examples of Provisions
- Provision for Depreciation: Allocation of the cost of a fixed asset over its useful life.
- Provision for Bad and Doubtful Debts: Amount set aside to cover expected losses from debtors.
- Provision for Taxation: Amount set aside for pending tax obligations.
Accounting Treatment of Provisions
Provisions are created by debiting the profit and loss account and crediting the respective provision account to ensure proper matching of revenue and expenses.
Understanding Reserves
What Are Reserves?
Reserves are retained portions of profit set aside to meet future contingencies, fund growth, or stabilise the company’s financial position. They are shown on the liabilities side of the balance sheet.
Importance of Reserves
- Strengthen the financial position
- Support future expansion
- Meet unforeseen contingencies
Types of Reserves
General Reserves vs. Specific Reserves
- General Reserve: Not earmarked for any specific purpose and can be utilised freely by the management.
- Specific Reserve: Created for a specific purpose and can only be utilised for that purpose, such as a dividend equalisation reserve.
Revenue Reserves vs. Capital Reserves
- Revenue Reserve: Created out of revenue profits and available for distribution as dividends.
- Capital Reserve: Created out of capital profits and not available for dividend distribution.
Comparison of Reserves
graph TD
A[Revenue Reserve] --> B[Created out of revenue profits]
A --> C[Strengthens financial position]
A --> D[Available for dividends]
E[Capital Reserve] --> F[Created out of capital profits]
E --> G[Written off capital losses]
E --> H[Not for dividends]
Secret Reserves
Secret reserves are reserves that are not disclosed in the balance sheet, often created by undervaluing assets or charging higher depreciation than required. These reserves provide a cushion against future uncertainties but should be used judiciously to maintain transparency.
Disposal of Depreciated Assets
Disposal at End of Useful Life
When an asset is disposed of at the end of its useful life, the amount realised is credited to the asset account, and any balance is transferred to the profit and loss account.
Disposal During Useful Life
When disposed of during its useful life, the accumulated depreciation is transferred to the asset account before recording the sale, and the resultant profit or loss is adjusted in the profit and loss account.
Summary and Key Takeaways
Key Concepts and Definitions
- Depreciation: Allocation of the cost of a tangible fixed asset over its useful life.
- Provision: Amount set aside from profits for uncertain liabilities or expenditures.
- Reserve: Retained portion of profit to meet future contingencies and support growth.
- Secret Reserve: Reserve not disclosed in the balance sheet, used to mitigate future uncertainties.
- Methods of Depreciation: Straight-Line Method and Written-Down Value Method.
- Categories of Reserves: General, Specific, Revenue, and Capital Reserves.
Understanding these concepts is crucial for accurately reflecting a business's financial health and preparing for future uncertainties.
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