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Question-1

You are looking at the profit and loss account of three business enterprises. You find the term depletion in first case and amortisation in third case. State the type of business of the two enterprises is into.

Solution:
Fixed assets, exhaustion of natural resources, specific contracted business.

Question-2

A pharmaceutical manufacturer has just developed and registered a patent for a rare medicine. Which term will appear in its profit and loss account regarding the cost of patent written-off?

Solution:
Amortisation

Question-3

What is ‘Depreciation’?

Solution:
“Depreciation” means decline in the value of a fixed assets due to use, passage of time or obsolescence. For example, if a business enterprise procures a machine and uses it in production process then the value of machine declines with its usage. Even if the machine is not used in production process, we can not expect it to realise the same sales price due to the passage of time or arrival of a new model (obsolescence). It implies that fixed assets are subject to decline in value and this decline is technically referred to as depreciation.

Question-4

State briefly the need for providing depreciation.

Solution:
The need for providing depreciation in accounting records arises from conceptual, legal, and practical business consideration. These considerations provide depreciation a particular significance as a business expense. The following are the needs for providing depreciation:

 

Matching of Costs and Revenue

The basis of the acquisition of fixed assets in business operations is that these are used in the earning of revenue. These assets are bound to undergo some wear and tear, and lose their value, once it is put to use in business.

Therefore, depreciation is like any other expense incurred in the normal course of business like salary, carriage, postage and stationary, etc. It is a charge against the revenue of the corresponding period and must be deducted before arriving at net profit.

 

Consideration of Tax

Depreciation is a deductible cost for tax purposes.

 

True and Fair Financial Position

If depreciation on assets is not provided for, then the assets will be over valued and the balance sheet will not depict the correct financial position of the business.

 

Compliance with Law

Apart from tax regulations, there are certain specific legislations that indirectly compel some business organisations like corporate enterprises to provide depreciation on fixed assets.

Question-5

Explain basic factors affecting the amount of depreciation.

Solution:
The determination of depreciation depends on three parameters, viz. cost, estimated useful life and probable salvage value.

Cost of Asset Cost of an asset includes invoice price and other costs, which are necessary to put the asset in use or working condition. In addition to the purchase price, it includes freight and transportation cost, transit insurance, installation cost, registration cost, commission paid on purchase of asset adds items such as software, etc. In case of purchase of a second hand asset it includes initial repair cost to put the asset in workable condition.

Estimated Net Residual Value Net Residual value (also known as scrap value or salvage value for accounting purpose) is the estimated net realisable value (or sale value) of the asset at the end of its useful life. The net residual value is calculated after deducting the expenses necessary for the disposal of the asset.

Depreciable Cost Depreciable cost of an asset is equal to its cost less net residual value It is the depreciable cost, which is distributed and charged as depreciation expense over the estimated useful life of the asset.

Estimated Useful Life Useful life of an asset is the estimated economic or commercial life of the asset. Physical life is not important for this purpose because an asset may still exist physically but may not be capable of commercially viable production. Estimation of useful life of an asset is difficult as it depends upon several factors such as usage level of asset, maintenance of the asset, technological changes, market changes, normally, useful life is shorter than the physical life. The useful life of an asset is expressed in number of years but it can also be expressed in other units, e.g., number of units of output (as in case of mines) or number of working hours. Useful life depends upon the following factors: Pre-determined by legal or contractual limits, e.g. in case of leasehold asset, the useful life is the period of lease.
  The number of shifts for which asset is to be used.
  Repair and maintenance policy of the business organisation.
  Technological obsolescence.
  Innovation/improvement in production method.
  Legal or other restrictions.

Question-6

Distinguish between straight line method and written down value method of calculating depreciation.

Solution:
The following are the differences between the straight line method and the written down value method of calculating depreciation:
 

Basis of Difference

Straight Line Method

Written Down Value Method

1. Basis of charging depreciation Original cost

Book Value (i.e. original ciation cost less depreciation charged till date)

2. Annual depreciation charge Fixed (Constant) year unequal year after year. It increases in later years.

Declines year after year

Almost equal every year.

3. Total charge against profit and loss account in respect of depreciation and repairs

Not recognised Recognised
4. Recognition by income tax law



5. Suitablity
It is suitable for assets in which repair charges are less, the possibility of and obsolescence is low
Scrap value depends upon expenses the time period involved time.

It is suitable for assets, which are affected by technological changes and obsolescence is low and require more repair expenses with passage of time.

 

Question-7

Distinguish between ‘provision’ and ‘reserve’.

Solution:
The following are the differences between the reserve and provision:

1. Basic nature: A provision is a charge against profit whereas reserve is an appropriation of profit. Hence, net profit cannot be calculated unless all provisions have been debited to profit and loss account, while a reserve is created after the calculation of net profit.

2. Purpose: Provision is made for a known liability or expense pertaining to current accounting period, the amount of which is not certain. On the other hand reserve is created for strengthening the financial position of the business. Some reserves are also mandatory under the law.

3. Presentation in balance sheet: Provision is shown either (i) by way of deduction from the item on the asset side for which it is created, or (ii) on the liabilities side along with current liabilities. On the other hand, reserve is shown on the liabilities side after capital.

4. Effect on taxable profits: Provision is deducted before calculating taxable profits. Hence, it reduces taxable profits. A reserve is created from profit after tax and therefore it has no effect on taxable profit.

5. Element of compulsion: Creation of provision is necessary to ascertain true and fair profit or loss. It has to be made even if there are no profits. But the creation of a reserve is generally at the discretion of the management. However, in certain cases law has stipulated for the creation of specific reserves such as Debenture redemption Reserve. Reserve cannot be created unless there are profits.

6. Use for the payment of dividend: Provision cannot be used for distribution as dividends while general reserve can be used for dividend distribution.

Question-8

Give four examples each of ‘provision’ and ‘reserves’.

Solution:
The examples of provisions are: Provision for depreciation;
  Provision for bad and doubtful debts;
  Provision for taxation;
  Provision for discount on debtors; and
  Provision for repairs and renewals.

Examples of reserves are:

General reserve;
  Workmen compensation fund;
  Investment fluctuation fund;
  Capital reserve;
  Dividend equalisation reserve;
  Reserve for redemption of debenture.

 

Question-9

Distinguish between ‘revenue reserve’ and ‘capital reserve’.

Solution:
The revenue reserves and capital reserves are differentiated on the following basis:

 

1. Source of creation: Revenue reserve is created out of revenue profits, which arise out of the normal operating activities of the business and are otherwise available for dividend distribution. On the other hand capital reserve is created primarily out of capital profit, which does not arise from the normal operating activities of the business and are not available for distribution as dividend. But revenue profits may also be used for creation of capital reserves.

 

2. Purpose: Revenue reserve is created to strengthen the financial position, to meet unforeseen contingencies or for some specific purposes. But the capital reserve is created for compliance of legal requirements or accounting practices.

 

3. Usage: A specific revenue reserve can be utilised only for the earmarked purpose while a general reserve can be utilised for any purpose including distribution of dividend. But a capital reserve can be utilised for specific purposes as provided in the law in force, e.g. to write off capital losses or issue of bonus shares.

Question-10

Give four examples each of ‘revenue reserve’ and ‘capital reserves’.

Solution:
Revenue reserves: Revenue reserves are created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend. Examples of revenue reserves are: General reserve;
  Workmen compensation fund;
  Investment fluctuation fund;
  Dividend equalisation reserve;
  Debenture redemption reserve;
Capital reserves: Capital reserves are created out of capital profits which do not arise from the normal operating activities. Examples of capital profits, which are treated as capital reserves are: Premium on issue of shares or debenture.
  Profit on sale of fixed assets.
  Profit on redemption of debentures.
  Profit on revaluation of fixed asset & liabilities.
  Profits prior to incorporation.
  Profit on reissue of forfeited shares

 

Question-11

Explain the concept of ‘secret reserve’.

Solution:
Secret reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the disclosed profits and also the tax liability. The secret reserve can be merged with the profits during the lean periods to show improved profits. Management may resort to the creation of secret reserve by charging higher depreciation than required. It is termed as ‘Secret Reserve’, as it is not known to outside stakeholders. Secret reserve can also be created by way of: Undervaluation of inventories/stock
  Charging capital expenditure to profit and loss account
  Making excessive provision for doubtful debts
  Showing contingent liabilities as actual liabilities

 

Question-12

M/s Mehra and Sons acquired a machine for Rs. 1, 80,000 on October 01, 2003, and spent Rs 20,000 for its installation. The firm writes-off depreciation at the rate of 10% on original cost every year. Record necessary journal entries for the year 2003 and draw up Machine Account and Depreciation Account for first three years given that:

(i) The book of accounts closes on March 31 every year; and

(ii) The firm charges depreciation to asset account.

 

 


Solution:

Books of Mehra and Sons

Journal

Date

Particulars

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

2003

Oct. 01

 

 

 

Oct 01

 

 


2004


Mar. 31

 

 



Mar.31

 

 

 



2005

Mar. 31

 

 




Mar 31

 

 


2006

Mar. 31

 

 





Mar. 31



Machine A/c Dr.

To Bank A/c

(Purchased machine for Rs.1,80,000)


Machine A/c Dr.

To Bank A/c

(Expenses incurred on installation)




Depreciation A/c Dr.

To Machine A/c

Depreciation charged on machine)


Profit and Loss A/c Dr.

To Depreciation A/c

(Depreciation debited to profit and loss account)



Depreciation A/c Dr.

To Machine A/c

(Depreciation charged on machine)

Profit and Loss A/c Dr.

To Depreciation A/c 20,000

(Depreciation debited to profit and loss account)



Depreciation A/c Dr.

To Machine A/c

(Depreciation charged on machine)


Profit and Loss A/c Dr.

To Depreciation A/c

(Depreciation debited to profit and loss account)

 

 

1,80,000

 

 

 

20,000

 

 






10,000

 

 



10,000

 






20,000

 




20,000

 

 




20,000

 

 



20,000

 

 

1,80,000

 

 

 



20,000

 

 

 




10,000

 

 



10,000

 


 



20,000

 




20,000

 

 




20,000

 

 



20,000

Books of M/s Mehra and Sons

Machine Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2003

Oct. 01

Oct 01

 

 

 

 

 

2004

Apr. 01

 

 

 

 

2005

Apr. 01

 

 

 

 

 

Bank

Bank

(Installation

expenses)

 

 

 

Balance b/d

 

 

 

 

Balance b/d

 

 

 

 

 

 

 

1,80,000

20,000


________

2,00,000

________

 

 


1,90,000



________

1,90,000

________

 

1,70,000

 



_______

1,70,000

________

2004

Mar. 31

 

 

 

 

 

 



Mar. 31

 

 

 

 




2006

Mar 31

 

Depreciation

(for 6 months) Balance c/d

 

 

 

 

 


Depreciation

Balance c/d

 

 

 

 


Depreciation

Balance c/d

 



10,000

1,90,000


_______

2,00,000 _______

 



20,000

1,70,000

_______

1,90,000

_______

20,000

1,50,000

_

______

1,70,000

_______

Depreciation Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.


2004

Mar 31

 

 

 

2005

Mar 31

 

 



2006 Dec 31


Machine

 

 

 

 

Machine

 

 

 



Machine

 


10,000


_________

10,000

_________

 


10,000


________

10,000

_________

 

20,000

_______

20,000

_______

 


2004

Mar 31

 

 

 

 

Mar 31

 

 

 

 


2006

Dec 31


Profit and

Loss

 

 

 

 

Profit and Loss

 

 

 



Profit and

Loss

 


10,000

________

10,000 ________

 

10,000

_______

10,000


________

10,000

________

20,000

________

Working Notes

(1) Calculation of original cost of the machine

  Rs.
Purchase cost 1, 80,000
Add Installation cost   (20,000)
Original cost 2, 00,000

(2) Depreciation expense = 10% of Rs. 2, 00,000 every year = Rs. 20,000 p.a.

(3) During the year 2003, depreciation shall be charged only for 6 months, as acquisition date is October 01, 2003, i.e. the asset is used only for 6 months during the year 2003-04.

(4) Depreciation (2003-04) =

 

Question-13

M/s. Dalmia Textile Mills purchased machinery on April 01, 2001 for Rs. 2,00,000 on credit from M/s Ahuja and sons and spent Rs. 10,000 for its installation. Depreciation is provided @10% p.a. on written down value basis. Prepare Machinery Account for the first three years. Books are closed on March 31, every year.

Solution:

Books of Dalmia Textiles mills

Machinery Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2001       2002      
Apr. 01 Bank

Bank
  2,00,000
 
10,000
________

2,10,000 ________

Mar. 31

Depreciation

 

Balance c/d

 

 

21,000

1,89,000
_______

2,10,000 _______

2002

Apr. 01

Balance b/d  

1,89,000

________

1,89,000
________

2003

Mar. 31

Depreciation

Balance c/d
 

18,900

1,70,100

_______

1,89,000
_______

2003

Apr. 01

Balance b/d  

1,70,100

________

1,70,100
________

2004

Mar 31

 

Depreciation

Balance c/d

 

 

17,010

1,53,090
_______

1,70,100
_______

2004 Balance b/d   1,53,090        

Working Notes

1. Calculation of the amount of depreciation                            (Rs.)

Original cost on 01.01.2001                       2,10,000 (i.e. 2,00,000 + 10,000)

Less: Depreciation for the year 2001

(@10% of 2,10,000)                                 (21,000)1

                                                             ________

WDV on 31.12.2001/01.01.2002                 1,89,000

Less: Depreciation for the year 2002

(@10% of 1,89,000)                                (18,900)2

                                                            ________

WDV on 31.12.2002/01.01.2003                 1,70,100

Less: Depreciation for the year 2003

(@10% of 1,70,100)                                (17,010)3

                                                            ________

WDV on 31.12.2003                                 1,53,090
                                                            ________

 

Question-14

M/s Sahani Enterprises acquired a printing machine for Rs. 40,000 on July 01, 2001 and spent Rs. 5,000 on its transport and installation. Another machine for Rs. 35,000 was purchased on January 01, 2003. Depreciation is charged at the rate of 20% on written down value. Prepare Printing Machine account for the years ended on March, 31, 2002, 2003, 2004 and 2005.

Solution:

Books of Sahani Enterprises

Printing Machine Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2001

Jul. 01

 

 

 

 

2002

Apr. 01

Jan 01

 

 

 


 

2003

Apr. 01

 

 





2004

Apr 02



Bank

Bank

 

 

 



Balance b/d

Bank

 

 

 




Balance b/d

 

 

 

 



Balance b/d

 



40,000

5,000

________

45,000

________

 



38,250

35,000

 

________

73,250

________

 


 

63,850



_______

63,850
________

 

51,080

2002

Mar. 31

 

 

 

 

 



2003

Mar. 31

 

 

 

 



 

2004

Mar 31

 

Depreciation

 

Balance c/d

 

 

 

 



Depreciation

 Balance c/d

 

 

 

 

 



Depreciation

Balance c/d

 



6,750

38,250

_______

45,000 _______




9,400

63,850

_______

73,250

_______


 

12,770

51,080

_______

63,850

_______

Working Notes

Orignal cost machine purchased on July 01,2001 (Rs.)
45,000
(–) Depreciation till Mar. 31, 2002 (for 9 months @ 20%) (6,750)1
_______
   38,250
+ Cost of new machine purchased on Jan. 01,2003 (35,000)
_______
(–) Depreciation for the year 2002-2003  73,250
(20% of 38,250 + 20% of Rs. 35,000 for 3 month)  (9,400)2
_______
WDV on Mar. 31, 2003        63,850
(–) Depreciation for the year 2003 – 04 (20% of Rs. 73,850) (12,770)3
_______
WDV on Mar. 31, 2004  51,080
_______

Question-15

On January 01 2001, Khosla Transport Co. purchased five trucks for Rs. 20,000 each. Depreciation has been provided at the rate of 10% p.a. using straight line method and accumulated in provision for depreciation acount. On January 01, 2002, one truck was sold for Rs. 15,000. On July 01, 2003, another truck (purchased for Rs. 20,000 on Jan 01, 2001) was sold for Rs. 18,000. A new truck costing Rs. 30,000 was purchased on October 01, 2003. You are required to prepare trucks account, Provision for depreciation account and Truck disposal account for the years ended on December 2001, 2002 and 2003 assuming that the firm closes its accounts in December every year.

Solution:

Book of Khosla Transport Co.

Trucks Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2001

Jan. 01

 


 

2002

Jan. 01

 

 

 

 




2003

Jan. 01



Oct 01

 

Bank


(purchase of Truck)


Balance b/d

 

 

 

 




Balance b/d

Bank



(Purchase of new Truck)

 

_______

1,00,000 _______

1,00,000



1,00,000

 



_______

1,00,000

_______

 

80,000

30,000

_______

1,10,000

 

2001

Dec. 31

 

 


2002

Jan 01

Dec. 31

 

 

 

2003

Jul 01

Dec 31



Balance c/d

 

 

 


Truck Disposal



Balance c/d

 

 

 

 

Truck Disposal

Balance c/d

 

_______

1,00,000 _______

1,00,000


20,000

 

80,000

_______

1,00,000

_______

20,000

90,000

_______

1,10,000

Trucks Disposal Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2002

Jan. 01

 

 

 

 

 

 

2003

Jul. 01


Jul 01

 

 

 

 



Machinery

Balance b/d

 

 

 

 

 

Machinery

Profit and


Loss (Profit on sale )

 

 

 

20,000

 

 


_______

20,000

_______

20,000

3,000

 

 


_______

23,000

_______

2002

Jan 01
 

Jan 01

Jan 01

 

 

 

 

2003

Jul 01

 


Jul 01

 

Provision for depreciation


Bank (Sale)

Profit and Loss (loss on sale)

 

 

 

 

 

Provision for depreciation

(Rs.2,000+2,000+1,000)

Bank (Sale)

 

 

 

 2,000


15,000

  3,000

_______

20,000 _______

1,00,000


5,000

 

18,000

_______

23,000

_______

Provision for Depreciation Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2001

Dec 31

 

 

 

 

 


2002

Jan. 01

Dec 31

 



2003


Jan. 01

Dec 31

 

 

 

Balance c/d

 

 

 

 

 


Truck

Disposal

Balance c/d

 

 




Truck

Disposal

Balance c/d

 

 

 

 

10,000

_______

10,000

_______

 

 


2,000

16,000

_______

18,000

_______

 



5,000

18,750

_______

23,750

_______

2001

Dec 31

 

 

 

 

 


2002

Jan 01

Dec 31

 

 



2003

Jan. 01

Dec 31

 

 

 

depreciation

 

 

 

 

 

 


Balance b/d

Depreciation

 

 

 



Balance b/d

Depreciation

(Rs.6000+1000+750)

 



10,000

_______

10,000 _______

 

 



10,000

8,000

_______

18,000

_______


16,000

7,750

______

23,750

______

Working Notes

1. Calculation of amount of depreciation      Rs.
Year - 2001  
10% on Rs. 1,00,000 for one year       (10,000)1
Year - 2002  
10% on Rs. 80,000 for one year     (8000)2
Year – 2003  
10% on Rs. 60,000 for 1 year     6,000
10% on Rs. 20,000 for six months  1,000
10% on Rs. 30,000 for three months    7,50
________
   (7,750)3
________
2. Loss on sale of first truck  
Original cost on January 01, 2001 20,000
Less depreciation at 10% (2,000)
Book value on January 1, 2002 18,000
Sales price realised on 01.01.2002 (15,000)
________
Loss on sale of first machine (3,000)4
________
   
3. Profit on Sale of Second Truck  
Original cost on January 01, 2001 20,000
Less Depreciation at 10% for year 2001 (2,000)
Depreciation at 10% for 2002 (2,000)
Depreciation @10% for 6 months till July, 2003 (1,000)
Book value on 1.7.2003 15,000
Sale price 18,000
   
Profit on sale (3,000)5

 

Question-16

On April 01, 2004, following balances appeared in the books of M/s Kanishka Traders:

Furniture account Rs. 50,000, Provision for depreciation on furniture Rs. 22,000. On

 

October 01, 2004 a part of furniture purchased for Rupees 20,000 on April 01, 2000 was sold for Rs. 5,000. On the same date a new furniture costing Rs. 25,000 was purchased. The depreciation was provided @ 10% p.a. on original cost of the asset and no depreciation was charged on the asset in the year of sale. Prepare furniture account and provision for depreciation account for the year ending March 31, 2005.

 


Solution:

Books of Kanishka Traders
Furniture Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2004

Apr 01

Oct 10

 

 

 

 

 

 

 

 

Balance b/d

Bank

 

 

 

 

 

50,000

25,000

 

 



_______

75,000

_______

2004

Oct 01

Apr 01

 

Bank Provision for

depreciation

Profit and Loss (loss on sale)

Balance c/d

 



5,000

8,000

7,000


55,000

_______

75,000 _______

                      
 

Provision for Depreciation on Furniture Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2004

Oct 01

 

 

 

2005

Mar 31

 

 

Furniture

(Accumulated Depreciation on Furniture sold)



Balance c/d

 

 

 

8,000

 

 

 


18,250

_______

26,250

_______

2004

Apr31

 

 

 

 


2005

Mar 31

 

Balance b/d

 

 

 


Depreciation

(Rs.3000+1250)

 



22,000

 

 

 


4,250

_______

10,000 _______

Working Notes

1. Calculation of amount of depreciation  
Calculation of loss on sale     Rs.
Original cost of furniture on 01.10.2004    20,000
Less: Depreciation for 4 year from 01.04.2000 to  
31.04.2004 (no depreciation for the year of sale  
@10% p.a. on original cost   8,000
_____
Value as on 01.10.2004       12,000
Sale price        5,000
_____
2. Loss on sale          (7,000)1
Depreciation for the year 2004-05  
10% of Rs. 30,000 (Rs. 50,000 – Rs. 20,000) for full year   3,000
10% of Rs. 25,000 for 6 month    1,250
______
  4,250
______

 

Question-17

M/s Nishit Printing Press bought a printing machine for Rs. 6,80,000 on April 01, 2001. Depreciation was provided on straight line basis at the rate of 20% on original cost. On April 01, 2003 a modification was made in the machine to increase its technical reliability, at a cost of Rs. 70,000. However this modification is not expected to increase the useful life of the machine. At the same time an important component of the machine was replaced at a cost of Rs. 20,000 due to excessive wear and tear. Routine maintenance expenses during the year 2003-04 were Rs. 5,000.

 

Show the Machinery account, Provision for depreciation account and charge to profit and loss account in respect of the accounting year ended on March 31, 2004.

 


Solution:

Machinery Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2003

Apr 01

 

 

 

 

 

Balance b/d

Bank

Bank

 

 

 

6,80,000

70,000

20,000

_______

7,70,000
_______

2004

Mar31

 

 

 

 

 

 



Balance c/d

 

 

 

 

 

7,70,000

 



_______

7,70,000 _______

 

Provision for Depreciation Account

Dr.

Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2003

Mar 31

 

 

 

 

 

 

 

Balance c/d

 

 

 

 

 

 

 

 

4,38,000

 

 




_______

4,38,000
_______

2003

Apr 01

 

2004

Mar31

 

 

 

 



Balance b/d

 

Depreciation

 

 

 

 

 



2,72,000

 

1,66,000



_______

4,38,000 _______

Working Notes

1. Cost of modification and cost of component replaced are capitalised but routine repair expenses are revenue expenditure.

2. Calculation of balance of Provision for depreciation account on 01. 04. 2003.

Original cost on 01.04.2001         = Rs. 6, 80,000

Depreciation for the years 2001-02 and 2002-03

2[20/100× 6, 80,000]                 (Rs 2, 72,000)1

3. Depreciation for the year 2003-04 is calculated as under.

20% of Rs. 6, 80,000                                  = Rs. 1, 36,000

1/3 of Rs. 90,000*                                      = Rs. 30,000

Total depreciation for 2003-04                      = (Rs. 1, 66,000)2

4. Amount to be charged to profit and loss account

                                                                     Rs.

Depreciation                                                 1, 66,000

Repair and Maintenance                                 5,000

* Computation of depreciation on addition

 




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