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Method of Calculation of Depreciation

The rate of depreciation under this method may be determined by the following formula:

 

 

Description: 30742.jpg 

 

where

R = Rate of depreciation

n = Useful life of asset (in years),
 



Suitability: This method is suitable for those assets in relation to which:

  • The amount of repairs and renewals goes on increasing as the assets gets older
  • The possibilities of obsolescence are more
  • This method is suitable for plant and machinery, building etc.

Note: 
• The only method that ignores salvage value in the calculation of depreciation is the reducing balance method
• Be careful with the asset purchased during the accounting period. It requires computing the depreciation for a part of the year rather than full year. Always check the date on which the asset was placed in service. This holds good for both the methods
• If the date of purchase is not given in the problem, then provide depreciation for 6 months i.e. for half a year

 

Illustration 4

 


On 1st April 2011, A Ltd. purchased a second hand machine for ₹ 40,000 and spent ₹ 10,000 on its cartage, repairs and installation. On 30th Sept. 2013, repairs and renewals amounted to ₹ 2,000. Depreciation is to be provided at 20% p.a. according to written down value method.
 

Required: Prepare Machinery Account and Depreciation Account for the first three years assuming that the accounts are closed on 31st March each year.
 

Solution:




Illustration 5 [When an asset is sold during the year]

 

On 1st January 2012, A Ltd. purchased a second hand machine for ₹ 40,000 and spent ₹ 10,000 on its cartage, repairs and installation. On 30th Sept. 2012, repairs and renewals amounted to ₹ 2,000. On 30th Sept. 2013, this machine was sold for ₹ 25,000. Depreciation is to be provided @ 20% p.a. according to Written down Value Method.
 

Required: Prepare Machinery Account for the first three years assuming that the accounts are closed on 31st March each year.
 

Working Notes:

 

(i) Calculation of Profit / Loss on Sale of Machine.
 


The amount spent on repairs and renewals on 30-9-2013 is of revenue nature and not of capital nature and hence, not debited to Machinery Account.





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