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Effect of any Addition or Extension to the Existing Asset


Some additions or extensions may be required for the existing asset to be suitable for operations. Such additions/extensions may or may not become an essential part of the asset. The amount incurred on such additions/extensions is capitalised and written off as depreciation over the life of the asset. It is important to mention here that the amount so incurred is in addition to usual repair and maintenance expenses. AS-6 (Revised) mentions that:
  • Any addition or extension done, which becomes an integral part of the existing asset should be depreciated over the useful life of that asset;
  •  
  • The depreciation on such addition or extension may also be provided at the rate applied to the existing asset;
  • Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed off, depreciation, should be provided independently on the basis of its own useful life.
Example:
M/s Digital Studio bought a machine for Rs. 8, 00,000 on April 01, 2000. Depreciation was provided on straight-line basis at the rate of 20% on original cost. On April 01, 2002 a substantial modification was made in the machine to make it more efficient at a cost of Rs. 80,000. This amount is to be depreciated @ 20% on straight line basis. Routine maintenance expenses during the year 2003-04 were Rs. 2,000.

Draw up the Machine account, Provision for depreciation account and charge to profit and loss account in respect of the accounting year ended on March 31,2003.

 

Solution

Books of Digital Studio
Machine Account

Dr.             Cr.

 

Date

 

Particulars

 

J.F.

 

Amount

Rs.

 

Date

 

Particulars

 

J.F.

 

Amount

Rs.

2002

Apr 01

 

 

 

 

 

 

 

 

 

 

 

Balance c/d

 

 

 

 

 

 

4,96,000

 

 



_______

4,96,000
_______

2003

Apr01

 

 

2003

Mar 31

 

 

 

 

Balance c/d

 

 

 

8,80,000

 

 


________

8,80,000

_______

 

Provision for depreciation Account

Dr.             Cr.

Date

 

Particulars

J.F.

 

Amount

Rs.

Date

Particulars

J.F.

 

Amount

Rs.

2003

Mar 31

 

 

 

 

 

 

 

 

 

 

 

Balance b/d

 

 

 

 

 

 

 

 

4,96,000

 

 

 

_______

4,96,000

_______

2003

Mar 31

 

 

 

 

 

 

 

 

Balance b/d

 

Depreciation

 

 

 

 

 

 

 

3,20,000

1,76,000

 

 

________

4,96,000

_______


Working Notes
  1. Cost of modification is capitalised but routine repair expenses are treated as revenue expenditure.
  2. Calculation of balance of provision for depreciation account on 01.04.2002.
    Original Cost on 01.04.2000                                    = Rs. 8,00,000
    Depreciation for the years 2000-01 and 2001-02      = Rs 3,20,0001
    (@ 20% of Rs. 8,00,000)
  3. Depreciation for the year 2002-03 is calculated as under:
    20% of 8,00,000                                                    = Rs. 1,60,000
    20% of Rs. 80,000                                                 = Rs. 16,000
    Total Depreciation for 2002-03                                = Rs. 1,76,0002
  4. Amount to be charged to profit and loss account
    Depreciation                                                           Rs. 1,76,000
    Repair and maintenance                                          Rs. 2,000




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