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Question-1

What is ‘Depreciation’?

Solution:
Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is the cost of assets consumed in a business and not on its market value. According to Institute of Cost and Management Accounting, London (ICMA) terminology "The depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time."

Question-2

State briefly the need for providing depreciation.

Solution:
The requirement 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.

Question-3

What are the causes of depreciation?

Solution: Wear and Tear due to Use or Passage of Time
  Expiration of Legal Rights
  Obsolescence
 

Abnormal Factors

 

Question-4

Explain basic factors affecting the amount of depreciation.

Solution:
Cost of Asset
  Estimated Net Residual Value
  Depreciable Cost
  Estimated Useful Life

 

Question-5

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

Solution:
S. No. Straight Line Method Written Down value method
1. The basis of charge under straight line method is the original cost or cost of acquisition of the asset.

the basis of charging depreciation is net book value (i.e., original cost less depreciation till date) of the asset.

2 a fixed amount is charged every year during the life-time of an asset. the charge of depreciation declines every year with respect to the book value of the asset because depreciation is charged on the book value and not on the original cost which is a reducing base.
3. total charge against profit and loss account in respect of depreciation and repair expenses increases in later years under straight line method.

depreciation charge declines in later years, therefore total of depreciation and repair charge remains similar or equal year after year.

4. Straight line method is not recognized by Income Tax Act.

written down value method is recognized by the Income Tax Act.

5. Straight line method is suitable for assets in which repair charges are less, the possibility of obsolescence is less and scrap value depends upon the time period involved.

Written down value method is suitable for assets, which are affected by technological changes and require more repair expenses with passage of time

 

Question-6

"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.

Solution:
Written down value method is adopted for calculating depreciation for this type of asset.

Question-7

What are the effects of depreciation on profit and loss account and balance sheet?

Solution:
Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period with reference to the size of the depreciable amount.

Question-8

Distinguish between ‘provision’ and ‘reserve’ .

Solution:
Basis of Difference Provision Reserve
1. Basic nature

2. Purpose

 

 

3. Effect on taxable

 

4. Presentations in Balance sheet

 

5. Element of compulsion

 

 

 

 

 

6. Use for the payment of dividend

Charge against profit.

It is created for a known liability or expense pertaining to current accounting period, the amount of which is not certain.

It reduces taxable profits.

It is shown either (i) by way of deduction from the item on the asset side for which it is created, or (ii) In the liabilities side along with current liabilities.

Creation of provision necessary to ascertain true and fair profit or loss in compliance ‘Prudence’ or ‘Conservatism’ concept. It must be made even if there are no profits.

 

 

It cannot be used for dividend distribution.

Appropriation of profit.

It is made for strengthening the financial position of the business. Some reserves are also mandatory under law.

It has no effect on taxable profit.

It is shown on the liabilities side after capital amount.

Generally, creation of a Reserve at the discretion of the management Reserve cannot be created unless there are profits. However, in certain cases law has stipulated for the creation of specific reserves such as ‘Debenture’ ‘Redemption’ reserves.

It can be used for divided distribution.

 

Question-9

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

Solution:
Examples of provision

• Provision for depreciation;

• Provision for bad and doubtful debts;

• Provision for taxation;

• Provision for discount on debtors;

Examples of reserves

• General reserve;

• Workmen compensation fund;

• Investment fluctuation fund;

• Capital reserve;

Question-10

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

Solution:

Basis of difference

Revenue Reserve

Capital Reserve

1. Source of creation

 

 

 

2. Purpose

 

 

3. Usage

 

It is created out of revenue profits which arise out of normal operating activities of the business and are otherwise available for available for dividend distribution.

It is created to strengthen the financial position, to meet unforeseen contingencies or for some specific purposes.

A specific revenue reserve can be utilized only for the earmarked purpose while a general reserve can be utilized for any purpose including distribution of dividend.

It is created primarily out of capital profit which do not arise normal operating activities of the business and not available for dividend distribution. But revenue profits may also be used for this purpose.

It is created for compliance of legal requirements or accounting practices.

It can be utilized for specific purposes as provided in the law in force e.g. to write off capital losses or issue of bonus shares.

 

Question-11

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

Solution:
Examples of revenue reserves are:

• General reserve;

• Workmen compensation fund;

• Investment fluctuation fund;

• Dividend equalization reserve

Examples of 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

Question-12

Distinguish between ‘general reserve’ and ‘specific reserve’.

Solution:
S. No General Reserve Specific Reserve
1. There is no specific purpose for creating this reserve Specific reserve is the reserve created for some specific purpose and
2. It is also termed as free reserve because the management can freely utilize it for any purpose. Specific reserve can be utilized only for that purpose it has been created.

 

Question-13

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 choose to create of a secret reserve by charging higher depreciation than required. It is termed as ‘Secret Reserve’, as it is not known to outside stakeholders.

Question-14

Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

Solution:
a) Concept of depreciation

Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is the cost of assets consumed in a business and not on its market value. Depreciation is charged in each accounting period with reference to the size of the depreciable amount. It should be noted that the subject matter of depreciation, or its base, are ‘depreciable’ assets which:

• "are expected to be used during more than one accounting period;

• have a limited useful life; and

• are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business."

Examples of depreciable assets are machines, plants, furniture’s, buildings, computers, trucks, vans, equipments, etc.

b) Causes of Depreciation

These causes of depreciation have been very clearly spelt out as part of the definition of depreciation in the Accounting Standard 6 and are being elaborated here.

 

Wear and Tear due to Use or Passage of Time

Wear and tear means decline, and the consequent decrease in an assets value, arising from its use in business operations for earning revenue. It reduces the asset’s technical capacities. Another aspect of wear and tear is the physical deterioration.

An asset deteriorates simply with the passage of time, even though they are not being put to any use. This happens especially when the assets are exposed to the nature like weather, winds, rains, etc.

Expiration of Legal Rights

Some categories of assets lose their value after the agreement governing their use in business comes to an end after the expiry of pre-determined period.

Examples of such assets are patents, copyrights, leases, etc. who’s utility to business is extinguished immediately upon the removal of legal support to them.

Obsolescence

Obsolescence is another factor leading to depreciation of fixed assets. Obsolescence means the fact of being "out-of-date".

Obsolescence implies to an existing asset becoming out-of-date on account of the availability of better type of asset. It arises from such factors as:

• Technological changes;

• Improvements in production methods;

• Change in market demand for the product or service output of the asset;

• Legal or other description.

Abnormal Factors

Decline in the value of the asset may because of the abnormal factors such as accidents due to fire, earthquake, floods, etc. Accidental loss is permanent but not continuing or gradual.

For example, a car which has been repaired after an accident will not fetch the same price in the market even if it has not been used.

c) Need for Depreciation

The requirement 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.

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. Every asset is bound to go through some wear and tear, and lose its value, once it is put to use in business.

Therefore, consumption of the value of an asset is as much as 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 according to ‘Generally Accepted Accounting Principles’.

Consideration of Tax

Depreciation is a deductible cost for tax purposes. This helps in reducing the tax liability of the entity. Therefore, tax authorities make their own rules for calculating depreciation. These rules for the calculation of depreciation amount need not necessarily be similar to current business practices or regulations other than taxation.

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 show the correct financial position of the business. Also, this is not permitted either by established accounting practices or by specific provisions of law.

Compliance with Law

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

Question-15

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.

Solution:
1 Straight Line Method

This is the first and one of the extensively used methods of providing depreciation. This method is based on the assumption of equal usage of the asset over its entire useful life. It is called straight line method because if the amount of depreciation and corresponding time period is plotted on a graph, it will result in a straight line. It is also called fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the asset. In this method, a fixed and an equal amount is charged as depreciation in every accounting period during the lifetime of an asset. The amount annually charged as depreciation is such that it reduces the original cost of the asset to its scrap value, at the end of its useful life. This method is also known as fixed percentage on original cost method because same percentage of the original cost (depreciable cost) is written off as depreciation from year to year.

The depreciation amount to be provided under this method is computed by using the following formula:

Depreciation =

Rate of depreciation under straight line method is the percentage of the total cost of the asset to be charged as deprecation during the useful lifetime of the asset. Rate of depreciation is calculated as follows:

Rate of Depreciation =

Consider the following example; the original cost of the asset is Rs. 2, 50,000. The useful life of the asset is 10 years and net residual value is estimated to be Rs. 50,000. Now, the amount of depreciation to be charged every year will be computed as given below:

Annual Depreciation Amount =

                                 i.e. =               

The rate of depreciation will be calculated as:

(i) Rate of Depreciation =

From point (i), the annual depreciation amounts to Rs. 20,000.

Thus, the rate of depreciation will be =  
                                                                                                        

Written Down Value Method

Under this method, depreciation is charged on the book value of the asset. As the book value keeps on reducing by the annual charge of depreciation, it is also known as reducing balance method. This method involves the application of a pre-determined percentage of the book value of the asset at the beginning of every accounting period, so as to calculate the amount of depreciation. The amount of depreciation reduces year after year. For example, the original cost of the asset is Rs. 2, 00,000 and depreciation is charged @ 10% p.a. at written down value, then the amount of depreciation will be computed as follows:

(i) Depreciation I year) =

(ii) Written down value

(at the end of the I year) = Rs.2, 00,000-20,000 =Rs.1, 80,000

(iii) Depreciation (II year) =

(iv) Written down value

(at the end of the II year) = Rs.1, 80,000-Rs.18, 000 =Rs.1, 62,000

(v) Depreciation (III year) =

(vi) Written down value

(at the end of the III year) = Rs.1, 62,000-Rs.16, 200 =Rs.1, 45,800

It is clear from the example; the amount of depreciation goes on reducing year after year. For this reason, it is also known reducing installment or diminishing value method. This method is based upon the assumption that the benefit accruing to business from assets keeps on diminishing as the asset becomes old (refer figure 7.2).

This is due to the reason that a predetermined percentage is applied to a gradually shrinking balance on the asset account every year. Thus, large amount is recovered as depreciation charge in the earlier years than in later years.

Basis of Difference Straight Line Method Written Down Value Method
1. Basis of charging depreciation

2. Annual depreciation charge

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

4. Recognition by income tax law

5. Suitablity

 

Original cost

 

Fixed (Constant) year

Unequal year after year. It increases in later years.

 

Not recognized

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.

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

Declines year after year

Almost equal every year.


Recognized

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

 

Useful situations where the methods can be used

a) Straight Line Method: This method is suitable for those assets whose useful life can be estimated accurately and where the use of the asset is consistent from year to year. Example: leasehold buildings.

b) Written down value Method: Income Tax Act accepts this method for tax purposes. This method is suitable for fixed assets, which lasts for long and which require increased repair and maintenance expenses with passage of time. It can also be used where obsolescence rate is high.

Question-16

Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

Solution:
In the books of account, there are two types of arrangements for recording depreciation on fixed assets:

• Charging depreciation to asset account or

• Creating Provision for depreciation/Accumulated depreciation account.

Charging Depreciation to Asset account

According to this arrangement, depreciation is deducted from the depreciable cost of the asset (credited to the asset account) and charged (or debited) to profit and loss account. Journal entries under this recording method are as follows:

1. For recording purchase of asset             (only in the year of purchase)

Asset A/c Dr.                                     (with the cost of asset including

                                                        installation, freight, etc.)

To Bank/Vendor A/c

2. Following two entries are recorded at the end of every year

(a) For deducting depreciation amount from the cost of the asset.

Depreciation A/c Dr.                         (with the amount of depreciation)

To Asset A/c

(b) For charging depreciation to profit and loss account.

Profit & Loss A/c Dr.                         (with the amount of depreciation)

To Depreciation A/c

3. Balance Sheet Treatment

When this method is used, the fixed asset appears at its net book value (i.e. cost less depreciation charged till date) on the asset side of the balance sheet and not at its original cost (also known as historical cost).

 

Creating Provision for Depreciation Account/Accumulated

Depreciation Account

This method is designed to accumulate the depreciation provided on an asset in a separate account generally called ‘depreciation provision’ or ‘accumulated depreciation’.

Such accumulation of depreciation enables that the asset account need not be disturbed in any way and it continues to be shown at its original cost over the successive years of its useful life.

Some basic characteristic of this method of recording depreciation are:

• Asset account continues to appear at its original cost year after year over its entire life;

• Depreciation is accumulated on a separate account instead of being adjusted into the asset account at the end of each accounting period.

The following journal entries are recorded under this method:

1. For recording purchase of asset             (only in the year of purchase)

Asset A/c Dr.                                     (with the cost of asset including

                                                            installation, expenses etc.)

To Bank/Vendor A/c                                     (cash/credit purchase)

2. Following two journal entries are recorded at the end of each year:

(a) For crediting depreciation amount to provision for depreciation account

Depreciation A/c Dr.                         (with the amount of depreciation)

To Provision for depreciation A/c

(b) For charging depreciation to profit and loss account

Profit & Loss A/c Dr.                         (with the amount of depreciation)

To Depreciation A/c

3. Balance sheet treatment

In the balance sheet, the fixed asset continues to appear at its original cost on the asset side. The depreciation charged till that date appears in the provision for depreciation account, which is shown either on the "liabilities side" of the balance sheet or by way of deduction from the original cost of the asset concerned on the asset side of the balance sheet.

 

Question-17

Explain determinants of the amount of depreciation.

Solution:
Factors Affecting the Amount of Depreciation

 

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. Besides 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.

According to Accounting Standand-6 of ICAI, cost of a fixed asset is

"The total cost spent in connection with its acquisition, installation and commissioning as well as for addition or improvement of the depreciable asset".

For example, a photocopy machine is purchased for Rs. 50,000 and Rs. 5,000 is spent on its transportation and installation. In this case the original cost of the machine is Rs. 55,000 (i.e. Rs. 50,000 + Rs.5, 000) which will be written off as depreciation over the useful life of the machine.

Estimated Net Residual Value

Net Residual value (also known as scraps value or salvage value) 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.

For example, a machine is purchased for Rs. 50,000 and is expected to have a useful life of 10 years. At the end of 10th year it is expected to have a sale value of Rs. 6,000 but expenses related to its disposal are estimated at Rs. 1,000. Then its net residual value shall be Rs. 5,000 (i.e. Rs. 6,000 – Rs. 1,000).

Depreciable Cost

Depreciable cost of an asset is equal to its cost (as calculated in point 7.5.1 above) less net residual value (as calculated in point 7.5.2,) Hence, in the above example, the depreciable cost of machine is Rs. 45,000 (i.e., Rs. 50,000 – Rs. 5,000.) It is the depreciable cost, which is distributed and charged as depreciation expense over the estimated useful life of the asset.

In the above example, Rs. 45,000 shall be charged as depreciation over a period of 10 years. It is important to mention here that total amount of depreciation charged over the useful life of the asset must be equal to the depreciable cost. If total amount of depreciation charged is less than the depreciable cost then the capital expenditure is under recovered. It violates the principle of proper matching of revenue and expense.

Estimated Useful Life

The estimated useful life of the asset is of critical importance as a determinant of depreciation. 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.

Question-18

Name and explain different types of reserves in details.

Solution:
A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingency such as workmen compensation. Unlike provisions, reserves are the appropriations of profit to reinforce the financial position of the business. Reserve is not a charge against profit as it is not meant to cover any known liability or expected loss in future.

On the other hand, retention of profits in the form of reserves reduces the amount of profits available for distribution among the owners of the business. It is shown under the head Reserves and Surpluses on the liabilities side of the balance sheet after capital.

Examples of reserves are:

• General reserve;

• Workmen compensation fund;

• Investment fluctuation fund;

• Capital reserve;

• Dividend equalisation reserve;

• Reserve for redemption of debenture.

Types of Reserves

A reserve created by retention of profit of the business can be for either a general or a specific purpose.

1. General reserve: When the purpose for which reserve is created is not specified, it is called General Reserve. It is also termed as free reserve because the management can freely utilise it for any purpose. General reserve strengthens the financial position of the business.

2. Specific reserve: Specific reserve is the reserve created for some specific purpose and can be utilised only for that purpose.

Examples of specific reserves are given below:

(i) Dividend equalisation reserve: This reserve is created to stabilise or maintain dividend rate. In the year of high profit, amount is transferred to Dividend Equalisation reserve. In the year of low profit, this reserve amount is used to maintain the rate of dividend.

(ii) Workmen compensation fund: It is created to provide for the claims of the workers due to accident, etc.

(iii) Investment fluctuation fund: It is created to build up the decline in the value of investment due to market fluctuations.

(iv) Debenture redemption reserve: It is created to provide funds for redemption of debentures.

Reserves are also classified as revenue and capital reserves according to the nature of the profit out of which they are created.

(a) Revenue reserves: Revenue reserves are created from revenue profits which arise out of the general business activities and are otherwise freely available for distribution as dividend.

Examples of revenue reserves are:

• General reserve;

• Workmen compensation fund;

• Investment fluctuation fund;

• Dividend equalization reserve;

• Debenture redemption reserve;

(a) Capital reserves: Capital reserves are created out of capital profits which do not arise from the normal business activities. Such reserves are not available for distribution as dividend.

These reserves can be used for writing off capital losses or issue of bonus shares in case of a company.

 

Examples of capital profits, which are treated as capital reserves,whether transferred as such or not, 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-19

What are ‘provisions’. How are they created? Give accounting treatment in case of provision for doubtful Debts.

Solution:
Provisions

In every business entity, there are certain expenses/losses which are related to the current accounting period but amount of which is not known with certainty because they are not yet incurred. It is necessary to make provision for such items for ascertaining true net profit.

For example, a trader who sells on credit basis knows that some of the debtors of the current period would default and would not pay or would pay only partially. It is necessary to take into account such an expected loss while calculating true and fair profit/loss according to the principle of Prudence or Conservatism. Therefore, the trader creates a Provision for Doubtful Debts to take care of expected loss at the time of realisation from debtors. In the same manner, Provision for repairs and renewals may also be created to provide for expected repair and renewal of the fixed assets.

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.

It must be noted that the amount of provision for expense and loss is a charge against the revenue of the current period. Creation of provision ensures proper matching of revenue and expenses and calculation of true profits. Provisions are created by debiting the profit and loss account.

In the balance sheet, the amount of provision may be shown either:

• By deducting it from the concerned asset on the assets side.

For example, provision for doubtful debts is shown as deduction from the amount of sundry debtors and provision for depreciation as a deduction from the concerned fixed assets;

• By showing it on the liabilities side of the balance sheet along with current liabilities, for example provision for taxes and provision for repairs and renewals.

Accounting Treatment for Provisions

The accounting treatment is similar for all types of provisions. Hence, the accounting treatment is explained here taking up the case of provision for doubtful debts.

As already stated that when business transaction takes place on credit basis, debtors account is created and its balance is shown on the asset-side of the balance sheet.

These debtors may be of three types:

Good Debtors are those from where collection of debt is certain.

Bad Debts are those debtors from where collection of money is not possible and the amount of credit given is a certain loss.

Doubtful Debts are those debtors who may pay but business firm is not sure about the collection of full amount from them. In fact, as a matter of business experience, some percentages of such debtors are not likely to pay, hence treated as doubtful debts.

To consider this possible loss on account of non-payment by some debtors, it is a common practice and necessary also to make a suitable provision for doubtful debts at the time of ascertaining true profit or loss. The provision for doubtful debts is usually calculated as a certain percentage of the total amount due from sundry debtors after deducting/writing-off all known bad debts.

Provision for doubtful debts is also called ‘Provision for bad and doubtful debts’. It is created by debiting the amount of required provision to the profit and loss account and crediting it to provision for doubtful debts account.

For creating a provision for doubtful debts the following journal entry is recorded:

Profit and Loss A/c Dr. (with the amount of provision)

             To Provision for doubtful debts A/c

Question-20

1. On April 01, 2000, Bajrang Marbles purchased a Machine for Rs. 2,80,000 and spent Rs. 10,000 on its carriage and Rs. 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be Rs. 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.

 


Solution:

Books of Bajrang marbles

Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
01.04.2000 Bank   2,80,000 31.03.2001 Depreciation   28,000
  Bank (carriage and installation expenses)   20,000   Balance c/d   2,72,000
      3,00,000       3,00,000
               
01.04.01 Balance b/d   2,72,000 31.03.02 Depreciation   28,000
        31.03.02 Balance c/d   2,44,000
      2,72,000       2,72,000
               
01.04.02 Balance b/d   2,44,000 31.03.03 Depreciation   28,000
        31.03.03 Balance c/d   2,16,000
      2,44,000       2,44,000
               
01.04.03 Balance b/d   2,16,000 31.03.04 Depreciation   28,000
        31.03.04 Balance c/d   1,88,000
      2,16,000       2,16,000

 

Provision for depreciation Account

Dr.

 

Cr.

Date Particulars J.F. Amount Date Particulars J.F Amount
31.03.2001 Balance c/d   28,000 31.03.2001 Depreciation   28,000
      20,000       28,000
               
31.03.02 Balance c/d   56,000 01.04.2001 Balance b/d   28,000
        31.03.02 Depreciation   28,000
      56,000       56,000
               
31.03.03 Balance c/d   84,000 01.04.02 Balance c/d   56,000
        31.03.03 Depreciation   28,000
      84,000       84,000
               
31.03.04 Balance c/d   1,12,000 01.04.03 Balance b/d   84,000
        31.03.04 Depreciation   28,000
      1,12,000       1,12,000

Working Notes

Price of the machine: Rs. 2,80,000

Add Carriage expenses: Rs. 10,000

Installation charges: Rs. 10,000

Original cost Rs. 3,00,000

Scrap value Rs. 20,000

Life of the machine10 years

Depreciation amount

Question-21

On July 01, 2000, Ashok Ltd. Purchased a Machine for Rs. 1,08,000 and spent Rs. 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 Rs. 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.

Solution:
Working Notes

Cost of the machine        : Rs. 1,08,000

Add Installation expenses: Rs. 12,000

Original Cost                  : Rs. 1,20,000

Salvage value                 : Rs. 12,000

Useful life                       : 12 years

Depreciation amount

Depreciation for the first 6 months
 

Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
01.07.2000 Bank   1,08,000 31.12.2000 Depreciation   4,500
  Bank (installation expenses)   12,000 31.12.2000 Balance c/d   1,15,500
      1,20,000       1,20,000
               
01.01.2001 Balance b/d   1,15,500 31.12.01 Depreciation   9,000
        31.12.01 Balance c/d   1,06,500
      1,15,500       1,15,500
               
01.01.02 Balance b/d   1,06,500 31.12.02 Depreciation   9,000
        31.12.01 Balance c/d   97,500
      1,06,500       1,06,500

 
Dr.

Provision for depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F Amount
31.12.2000 Balance c/d   4,500 31.12.2000 Depreciation   4,500
      4,500       4,500
               
31.12.01 Balance c/d   13,500 01.01.2001 Balance b/d   4,500
        31.12.01 Depreciation   9,000
      13,500       13,500
               
31.12.2003 Balance c/d   22,500 01.01.2002 Balance b/d   13,500
        31.12.2003 Depreciation   9,000
      22,500       22,500

 

Question-22

Reliance Ltd. Purchased a second hand machine for Rs. 56,000 on October 01, 2001 and spent Rs. 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for Rs. 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of Rs. 1,000 is expected to be incurred to recover the salvage value of Rs. 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 December 31, every year.

Solution:
Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
01.10.01 Bank   56,000 31.12.01 Depreciation   1,300
01.10.01 Bank   28,000 31.12.01 Balance c/d   82,700
      84,000       84,000
               
31.12.02 Balance c/d   87,900 01.01.2002 Balance b/d   82,700
        31.12.02 Depreciation   5,200
      87,900       87,900
               
31.12.03 Balance c/d   93,100 01.01.03 Balance b/d   87,900
        31.12.03 Depreciation   5,200
      93,100       93,100

 

Dr.

Provision for depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F Amount
31.12.01 Balance c/d   1,300 31.12.01 Depreciation   1,300
      1,300       1,300
               
31.12.02 Balance c/d   6,500 01.01.02 Balance b/d   1,300
        31.12.02 Depreciation   5,200
      6,500       6,500
               
31.12.04 Balance c/d   11,700 01.01.03 Balance b/d   6,500
        31.12.04 Depreciation   5,200
      11,700       11,700

 

Question-23

Berlia Ltd. Purchased a second hand machine for Rs. 56,000 on July 01, 2001 and spent Rs. 24,000 on its repair and installation and Rs. 5,000 for its carriage. On September 01, 2002, it purchased another machine for Rs. 2,50,000 and spent Rs. 10,000 on its installation. (a) Prepare machinery account and depreciation account from the year 2001 to 2004, if depreciation is provided on machinery @10% p.a. on written down value method annually on December 31.

Solution:
Original Cost of the machine : Rs. 85,000

Depreciation amount (for 6 months @ 10%) : Rs. 4,250

                                                            : Rs. 80,750

Original cost of the machine purchased in 2002 : Rs.2,60,000

                                                                  : Rs. 3,40,750

Depreciation for the year ended 31.12.2002      : Rs. 16,742

(10% on Rs. 80,750 + 10% on Rs. 2,60,000

for 4 months)

WDV as on 31.12.03                                      : Rs. 3,24,008

(-) depreciation for the year 2003

(10% on 3,26,175)                                         : Rs. 32,401

WDV as on 31.12.04                                       : Rs. 2,91,607

(-) depreciation for the year ended 31.12.04       : Rs. 29,161

WDV as on 31.12.04                                       : Rs. 2,62,46

 

Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
01.07.01 Bank   56,000 31.12.01 Depreciation   4,250
01.07.01 Bank   29,000 31.12.01 Balance c/d   80,750
      85,000       85,000
               
01.01.02 Balance b/d   80,750 31.12.02 Depreciation   16,742
01.09.02 Bank   2,60,000 31.12.02 Balance c/d   3,24,008
      3,40,750       3,40,750
               
01.01.03 Balance b/d   3,24,008 31.12.03 Depreciation   32,401
        31.12.03 Balance c/d   2,91,607
      3,24,008       3,24,008
               
01.01.04 Balance b/d   2,91,607 31.12.04 Depreciation   29,161
        31.12.04 Balance c/d   2,62,446
      2,91,607       2,91,607

 
Dr.

Provision for depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F Amount
31.12.01 Balance c/d   4,250 31.12.01 Depreciation   4,250
      4,250       4,250
               
31.12.02 Balance c/d   20,992 01.01.02 Balance b/d   4,250
        31.12.02 Depreciation   16,742
      20,992       20,992
               
31.12.03 Balance c/d   53,393 01.01.03 Balance b/d   20,992
        31.12.03 Depreciation   32,401
      53,393       53,393
               
31.12.04 Balance c/d   82,554 01.01.04 Balance b/d   53,393
        31.12.04 Depreciation   29,161
      82,554       82,554

 

Question-24

Ganga Ltd. purchased a machinery on January 01, 2001 for Rs. 5,50,000 and spent Rs. 50,000 on its installation. On September 01, 2001 it purchased another machine for Rs. 3,70,000. On May 01, 2002 it purchased another machine for Rs. 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 2001, 2002, 2003 and 2004.

 

(b) If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2001, 2002, 2003 and 2004.

 


Solution:
Working Notes

Purchase of machine in jan 2001   : Rs. 6,00,000

Purchase of machine in Sept 2001 : Rs. 3,70,000

                                                : Rs. 9,70,000

(-) Depreciation @ 10% p.a.         :

(@ 10% for Rs. 6,00,000 and for 4 months

for the second machine purchased) : Rs. 72,333

WDV as on 01.01.02                     : Rs. 8,97,667

Purchase of machine in May, 2002   : Rs. 8,40,000

                                                  : Rs. 17,37,667

(-) depreciation as on 31.12.02

(10% on 8,97,667+ 10% on 8,40,000 for
8 months 89,766+56,000)              : Rs. 1,45,766

WDV as on 01.01.03                      : Rs. 15,91,901

(-) depreciation as on 31.12.03

(10% on 15,91,901)                      : Rs. 1,59,190

WDV as on 01,01,04                     : Rs. 14,32,711

(-) depreciation as on 31.12.04

(10% on 14,32,711)                     : Rs. 1,43,271

                                                 : Rs. 12,89,439

 

Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
01.01.01 Bank   5,50,000 31.12.01 Depreciation   72,333
01.07.01 Bank   50,000 31.12.01 Balance c/d   8,97,667
01.09.01 Bank   3,70,000        
      9,70,000       9,70,000
               
01.01.02 Balance b/d   8,97,667 31.12.02 Depreciation   1,45,766
01.05.02 Bank   8,40,000 31.12.02 Balance c/d   15,91,901
      17,37,667       17,37,667
               
               
01.01.03 Balance b/d   15,91,901 31.12.03 Depreciation   1,59,190
        31.12.03 Balance c/d   14,32,711
      15,91,901       15,91,901
               
01.01.04 Balance b/d   14,32,711 31.12.04 Depreciation   1,43,271
        31.12.04 Balance c/d   12,89,439
      14,32,711       14,32,711

 
Dr.

Provision for depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F Amount
31.12.01 Balance c/d   72,333 31.12.01 Depreciation   72,333
      72,333       72,333
               
31.12.02 Balance c/d   2,18,099 01.01.02 Balance b/d   72,333
        31.12.02 Depreciation   1,45,766
      2,18,099       2,18,099
               
31.12.03 Balance c/d   3,77,289 01.01.03 Balance b/d   2,18,099
        31.12.03 Depreciation   1,59,190
      3,77,289       3,77,289
               
31.12.04 Balance c/d   5,20,560 01.01.04 Balance b/d   3,77,289
        31.12.04 Depreciation   1,43,271
      5,20,560       5,20,560

 

Question-25

Azad Ltd. purchased furniture on October 01, 2002 for Rs. 4,50,000. On March 01, 2003 it purchased another furniture for Rs. 3,00,000. On July 01, 2004 it sold off the first furniture purchased in 2002 for Rs. 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 31,2003, March 31,2004 and March 31,2005. Also give the above two accounts if furniture disposal account is opened.

Solution:
Working notes

Original Cost of the furniture purchased in Oct 01, 2002 : Rs. 4,50,000

Less depreciation @ 15% for 6 months                         : Rs. 33,750

                                                                              : Rs. 4,16,750

Less depreciation @ 15% on WDV                               : Rs. 62,438

Book value as on April, 2003                                       : Rs. 3,53,812

Less Depreciation for 4 months                                    : Rs. 17,691

Book value as on March 04                                          : Rs. 3,36,121

Sale price realized in July, 2003                                   : Rs. 2,25,000

Loss on Sale of the first machine                                 : Rs. 1,11,12  

Dr.

Furniture Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Oct 2002 Bank   4,50,000 March 03 Depreciation(6 months)   33,750
        March 03 Balance c/d   4,16,250
      4,50,000       4,50,000
               
April 03 Balance b/d   4,16,250 March 04 Depreciation(62,438+45,000)   1,07,438
March 03 Bank   3,00,000 March 04 Balance c/d   6,08,812
               
      7,16,250       7,16,250
               
April 04 Balance b/d   6,08,812 March 05 Depreciation (17,691+38,250)   55,941
        July 04 Sale of first machine   2,25,000
        March 05 Bank (Loss on sale of first machine)   1,11,121
        March 05 Balance c/d   2,16,750
      6,08,812       6,08,812

 

Dr.

Furniture Disposal Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
2004

April

Furniture   4,50,000 March 05 Accumulated depreciation   1,13,879
        March 05 Bank (sale)   2,25,000
        March 05 Profit and Loss Account (Loss on sale)   1,11,121
      4,50,000       4,50,000

 
Dr.

Accumulated Depreciation on Furniture Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
March 04 Balance c/d   33,750 April 03 Depreciation   33,750
      33,750       33,750
               
March 05 Balance c/d   96,188 April 04 Balance b/d   33,750
          Depreciation   62,438
      96,188       96,188
               
March 06 Balance c/d   1,13,879 April 05 Balance b/d   96,188
          Depreciation   17,691
      1,13,879       1,13,879

 

Question-26

M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2001 for Rs. 1,00,000. On July 01, 2002 another machine costing Rs. 2,50,000 was purchased . The machine purchased on April 01, 2001 was sold for Rs. 25,000 on October 01, 2005. The company charges depreciation @15% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2006.

Solution:
Working Notes

Original cost of the machine purchased on April 01, 2001 : Rs. 1,00,000

Less Depreciation @ 15% for the year 2001                   : Rs. 15,000

                                                                               : Rs. 85,000

Less Depreciation @ 15% for the year 2002                   : Rs. 15,000

                                                                               : Rs. 70,000

Less Depreciation @ 15% for the year 2003                   : Rs. 15,000

                                                                               : Rs. 55,000

Less Depreciation @ 15% for the year 2004                   : Rs. 15,000

                                                                               : Rs. 40,000

Less Depreciation @ 15% for 6 months                         : Rs. 7,500

                                                                               : Rs. 32,500

Sale of machine                                                         : Rs. 25,000

Loss on sale of machine                                              : Rs. 7,500
 

  Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
April 01 Bank   1,00,000 March 02 Depreciation   15,000
          Balance c/d   85,000
      1,00,000       1,00,000
               
April 02 Balance b/d   85,000 March 03 Depreciation(15,000+28,125)   46,125
July 02 Bank   2,50,000   Balance c/d   2,91,875
      3,35,000       3,35,000
               
April 03 Balance b/d   2,91,875 March 04 Depreciation   52,500
          Balance c/d   2,39,375
      2,91,875       2,91,875
               
April 05 Balance b/d   2,39,375 March 06 Depreciation(7,500+37,500)   45,000
        July 05 Bank (Sale)   25,000
        Oct 05 Loss on sale   7,500
        March 06 Balance c/d   1,61,875
      2,39,875       2,39,875

 
Dr.

Machinery Disposal Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
April 06 Machinery   1,00,000 April 06 Provision for depreciation   67,500
        July 05 Bank (sale)   25,000
        April 06 Loss on sale of machinery   7,500
      1,00,000       1,00,000

 

Question-27

The following balances appear in the books of Crystal Ltd, on Jan 01, 2005

Rs.

Machinery account on 15,00,000

Provision for depreciation account 5,50,000

 

On April 01, 2005 a machinery which was purchased on January 01, 2002 for Rs. 2,00,000 was sold for Rs. 75,000. A new machine was purchased on July 01, 2005 for Rs. 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, 2005.

 


Solution:
Working Notes

Original cost of machine purchased on July 01, 2005          : Rs. 2,00,000

Less Depreciation @ 20% for 3 years (Jan 2002-Dec 2005) : Rs. 1,20,000

                                                                                 : Rs. 80,000

Less Sale                                                                    : Rs. 75,000

Loss on sale of machinery                                              : Rs. 5,000

 

Dr.

Machinery Disposal Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Jan 05 Balance b/d   15,00,000 Jan 02 Bank (Sale)   75,000
July 05 Bank   6,00,000 Dec 2005 Provision for depreciation   1,20,000
        April 05 Loss on sale   5,000
        Dec 05 Balance c/d   19,00,000
      21,00,000       21,00,000

 
Dr.

Provision for Depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
April 05 Machine   1,20,000 Jan 05 Balance b/d   5,50,000
Dec 05 Balance c/d   7,50,000 Dec 05 Depreciation(2,60,000+60,000)   3,20,000
      8,70,000       8,70,000

 

Question-28

M/s. Excel Computers has a debit balance of Rs. 50,000 (original cost Rs. 1,20,000) in computers account on April 01, 2000. On July 01, 2000 it purchased another computer costing Rs. 2,50,000. One more computer was purchased on January 01, 2001 for Rs. 30,000. On April 01, 2004 the computer which has purchased on July 01, 2000 became obselete and was sold for Rs. 20,000. A new version of the IBM computer was purchased on August 01, 2004 for Rs. 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31, 2001, 2002, 2003 ,2004 and 2005. The computer is depreciated @10 p.a. on straight line method basis.

Solution:
Working Notes

Original cost of machine purchased in 2000 : Rs. 2,50,000

Less Depreciation @ 10% for 9 months       : Rs. 18,750

                                                             : Rs. 2,31,250

Less depreciation @ 10% for the year 2001 : Rs. 25,000

                                                             : Rs. 2,06,250

Less depreciation @ 10% for the year 2002 : Rs. 25,000

                                                             : Rs. 1,81,250

Less depreciation @ 10% for the year 2003 : Rs. 25,000

                                                             : Rs. 1,56,250

Sale                                                       : Rs. 20,000

Loss on sale of computer                           : Rs. 1,36,250


 
Dr.

Computer Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
April 2000 Balance b/d   50,000 March 2004 Depreciation   93,750
July 2000 Bank   2,50,000 March 2004 Loss on sale   1,36,250
Jan 2001 Bank   30,000 March 2004 Depreciation (72,000+6083)   78,083
Aug 2004 Bank   80,000 April 2004 Bank (Sale)   20,000
        March 2004 Balance c/d   81917
      4,10,000       4,10,000

 

Question-29

Carriage Transport Company purchased 5 trucks at the cost of Rs. 2,00,000 each on April 01, 2001. The company writes off depreciation @ 20% p.a. on original cost and closes its books on December 31, every year. On October 01, 2003, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay Rs. 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for Rs. 1,00,000 and spent Rs. 20,000 on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2003. Also give truck account if truck disposal account is prepared.

Solution:
Working Notes:
 
Dr.

Trucks Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
April 2001 Bank (Purchase of truck)   10,00,000 Dec 2002 Balance c/d   10,00,000
      10,00,000       10,00,000
               
Jan 2003 Balance b/d   10,00,000 Oct 2003 Truck disposal   2,00,000
               
Oct 2003 Bank (purchase of new truck)   1,20,000 Dec 2003 Balance c/d   9,20,000
      11,20,000       11,20,000

 
Dr.

Truck Disposal Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Jan 2001 Truck disposal   2,00,000 Jan 2003 Provision for depreciation   40,000
        July 05 Insurance Claim   70,000
        Dec 05 Loss on sale of machinery   30,000
      2,00,000       2,00,000

 

Dr.

Provision for depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2002 Balance c/d   2,00,000 Dec 2002 Depreciation   2,00,000
      2,00,000       2,00,000
               
Jan 2003 Truck disposal   40,000 Jan 2003 Balance b/d   2,00,000
Dec 2003 Balance c/d   4,24,000   Depreciation   2,64,000
      4,64,000       4,64,000

 

Question-30

Saraswati Ltd. purchased a machinery costing Rs. 10,00,000 on January 01, 2001. A new machinery was purchased on 01 May, 2002 for Rs. 15,00,000 and another on July 01, 2004 for Rs. 12,00,000. A part of the machinery which originally cost Rs. 2,00,000 in 2001 was sold for Rs. 75,000 on October 31, 2004. Show the machinery account, provision for depreciation account and machinery disposal account from 2001 to 2005 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year.

Solution:
Working notes

Original cost of the machine purchased in 2001       : Rs. 2,00,000

Less Depreciation @ 10% for 2001, 2002 and 2003 : Rs. 60,000

                                                                        : Rs. 1,40,000

Less Depreciation @ 10% for 10 months                 : Rs. 16,666

                                                                        : Rs. 1,23,334

Sale                                                                  : Rs. 75,000

Loss on sale                                                       : Rs. 48,334

Depreciation for the asset purchased in 2001

Original cost of the asset                                     : Rs. 8,00,000

Less depreciation @10% for 4 years                      : Rs. 3,20,000

                                                                       : Rs. 4,80,000
 

Dr.

Machinery Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Jan 2001 Bank   10,00,000 Dec 2001 Depreciation   1,00,000
          Balance c/d   9,00,000
      10,00,000       10,00,000
               
Jan 2002 Balance c/d   9,00,000 Dec 2002 Depreciation(1,00,000+1,00,000)   2,00,000
May 2002 Bank   15,00,000   Balance c/d   22,00,000
      24,00,000       24,00,000
               
Jan 2003 Balance b/d   22,00,000 Dec 2003 Depreciation(1,00,000+1,50,000)   2,50,000
          Balance c/d   19,50,000
      22,00,000       22,00,000
               
Jan 2004 Balance b/d   19,50,000 Dec 2004 Depreciation(1,00,000+1,50,000+60,000)   3,10,000
July 2004 Bank   12,00,000 Oct 2004 Bank (Sale)   75,000
        Dec 2004 Machine disposal   2,00,000
        Dec 2004 Balance c/d   25,65,000
      31,50,000       31,50,000

 
Dr.

Machine Disposal Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2004 Machinery   2,00,000 Dec 2004 Provision for depreciation   76,666
        Oct 2004 Bank   75,000
        Dec 05 Loss on sale of machinery   48,334
      2,00,000       2,00,000

 
Dr.

Provision for depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2001 Balance c/d   1,00,000 Dec 2001 Depreciation   1,00,000
      1,00,000       1,00,000
               
Dec 2002 Balance c/d   3,00,000 Jan 2002 Balance b/d   1,00,000
        Dec 2002 Depreciation   2,00,000
      3,00,000       3,00,000
               
Dec 2003 Balance c/d   5,50,000 Jan 2003 Balance b/d   3,00,000
        Dec 2003 Depreciation   2,50,000
      5,50,000       5,50,000
               
Dec 2004 Balance c/d   8,60,000 Jan 2004 Balance b/d   5,50,000
        Dec 2004 Depreciation   3,10,000
      8,60,000       8,60,000
               
Dec 2005 Balance c/d   11,00,000 Jan 2005 Balance b/d   8,60,000
        Dec 2004 Depreciation   2,40,000
      11,00,000       11,00,000

 

Question-31

On July 01, 2001 Ashwani purchased a machine for Rs. 2,00,000 on credit. Installation expenses Rs. 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be Rs. 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2001 and prepare necessary ledger accounts for first three years.

Solution:
Working Notes

Original Cost of the machine        : Rs. 2,25,000

Life of the machine                     : 5 years

Scrap value                                : Rs. 20,000

Amount of depreciation                :Rs. 41,000 p.a.

Journal entries

July 2001

a) Machine a/c Dr.              2,00,000
             To Bank                     2,00,000
(Machine purchased)

July 2001

b) Machine a/c Dr.              25,000
           To Bank                      25,000
(Expenses incurred on installation)

Dec 2001

c) Depreciation a/c Dr.         20,500
              To Machine              20,500
(Depreciation charged on machine)

Dec 2001

d) Profit and Loss a/c Dr.       20,500
           To Depreciation            20,500
(Depreciation debited to profit and loss account)
 

Dr.

Machinery Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Jan 2001 Bank   2,00,000 Dec 2001 Depreciation (6 months)   20,500
Jan 2001 Bank (installation charges   25,000   Balance c/d   2,04,500
      2,25,000       2,25,000
               
Jan 2002 Balance b/d   2,04,500 Dec 2002 Depreciation   40,500
          Balance c/d   1,64,500
      2,04,500       2,04,500
               
Jan 2003 Balance b/d   1,64,500 Dec 2003 Depreciation   40,500
          Balance c/d   1,23,500
      1,64,500       1,64,500

 

Question-32

On October 01, 2000, a Truck was purchased for Rs. 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, 2003 this Truck was sold for Rs. 5,00,000. Accounts are closed on 31st March every year. Prepare a Truck Account for the four years.

Solution:
Working Notes

Original Cost of the truck                     : Rs. 8,00,000

Less Depreciation @ 15%                    : Rs. 60,000

WDV as on April 2002                         : Rs. 7,40,000

Less depreciation @ 15%                    : Rs. 1,11,000

WDV as on April 2003                         : Rs. 6,29,000

Less depreciation @ 15% for 9 months : Rs. 70,763

                                                       : Rs. 5,58,237

Sale value                                         : Rs. 5,00,000

Loss on sale                                      : Rs. 58,237

 
Dr.

Truck Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Oct 2001 Bank   8,00,000 March 2002 Depreciation (6 months)   60,000
          Balance c/d   7,40,000
      8,00,000       8,00,000
               
April 2002 Balance b/d   7,40,000 March 2003 Depreciation   1,11,000
        Dec 2003 Sale   5,00,000
          Profit and Loss (Loss on sale)   58,237
      7,40,000       7,40,000

 

Question-33

Kapil Ltd. purchased a machinery on July 01, 2001 for Rs. 3,50,000. It purchased two additional machines, on April 01, 2002 costing Rs. 1,50,000 and on October 01, 2002 costing Rs. 1,00,000. Depreciation is provided @10% p.a. on straight line basis. On January 01, 2003, first machinery become useless due to technical changes. This machinery was sold for Rs. 1,00,000. prepare machinery account for 4 years on the basis of calendar year.

Solution:
Working Notes

Vale of machine purchased in July 2001   : Rs. 3,50,000

Less depreciation @ 10% for 6 months    : Rs. 17,500

Value of machine as on Jan 2002            : Rs. 3,32,500

Less depreciation @ 10%                       : Rs. 35,000

Value as on Jan 2003                             : Rs. 2,97,500

Sale value                                            : Rs. 1,00,000

Loss on sale of machinery                       : Rs. 1,97,500

Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
July 01 Bank   3,50,000 Dec 01 Depreciation (for 6 months)   17,500
          Balance c/d   3,32,500
      3,50,000       3,50,000
               
Jan 2002 Balance b/d   3,32,500 Dec 2002 Depreciation (35,000+11,250+2500)   48,750
April 2002 Bank   1,50,000   Balance c/d   5,33,750
Oct 2002 Bank   1,00,000        
      5,82,750       5,82,750
               
Jan 2003 Balance c/d   5,33,750 Jan 2003 Bank (Sale)   1,00,000
        Dec 2003 Depreciation (15,000+10,000)   25,000
          Profit & Loss (Loss on sale)   1,97500
      5,33,750       5,33,750

 

Question-34

On January 01, 2001, Satkar Transport Ltd, purchased 3 buses for Rs. 10,00,000 each. On July 01, 2003, one bus was involved in an accident and was completely destroyed and Rs. 7,00,000 were received from the Insurance Company in full settlement. Depreciation is writen off @15% p.a. on diminishing balance method. Prepare bus account from 2001 to 2004. Books are closed on December 31 every year.

Solution:
Working Notes:

Cost of the bus purchased in Jan 2001       : Rs. 10,00,000

Less Depreciation @ 15%                        : Rs. 1,50,000

WDV as on Dec 2001                              : Rs. 8,50,000

Less depreciation @ 15%                        : Rs. 1,27,500

WDV as on Dec 2002                              : Rs. 7,22,500

Less depreciation @ 15%                        : Rs. 54,188

WDV as on Dec 2003                              : Rs. 6,68,312

Sale of the bus                                      : Rs. 7,00,000

Profit on sale of the bus                         : Rs. 31,688


 
Dr.

Bus Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Jan 2001 Bank   30,00,000 Dec 2001 Depreciation   4,50,000
          Balance c/d   25,50,000
      30,00,000       30,00,000
               
Jan 2002 Balance b/d   25,50,000 Dec 2002 Depreciation   3,82,500
          Balance c/d   21,67,500
      25,50,000       25,50,000
               
Jan 2003 Balance b/d   21,67,500 Dec 2003 Depreciation (6 months)   1,62,563
Dec 2003 Profit & Loss (profit on sale)   31,688   Bank (Sale)   7,00,000
          Depreciation   2,20,125
          Balance c/d   11,16,500
      2199188       2199188
               
Jan 2004 Balance b/d   11,16,500 Dec 2004 Depreciation   1,67,475
          Balance c/d   9,49025
               
      11,16500       11,16500

 

Question-35

On October 01, 2001 Juneja Transport Company purchased 2 Trucks for Rs. 10,00,000 each. On July 01, 2003, One Truck was involved in an accident and was completely destroyed and Rs. 6,00,000 were received from the insurance company in full settlement. On December 31, 2003 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for Rs. 1,50,000. On January 31, 2004 company purchased a fresh truck for Rs. 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 2001 to 2004.

Solution:
Working Notes

Original cost of the truck                      : Rs. 10,00,000

Less depreciation @ 10%                     : Rs. 50,000

WDV as on March 2002                        : Rs. 9,50,000

Less depreciation @ 10%                     : Rs. 95,000

WDV as on March 2003                        : Rs. 8,55,000

Less depreciation @ 10% for 3 months : Rs. 21,375

WDV as on March 2004                        : Rs. 8,33,625

Sale                                                  : Rs. 6,00,000

Loss on sale of first truck                     : Rs. 2,33,625

Original cost of the truck                      : Rs. 10,00,000

Less depreciation @ 10%                     : Rs. 50,000

WDV as on March 2002                        : Rs. 9,50,000

Less depreciation @ 10%                     : Rs. 95,000

WDV as on March 2003                        : Rs. 8,55,000

Less depreciation @ 10% for 9 months   : Rs. 64,125

WDV as on March 2004                         : Rs. 7,90,875

Sale                                                   : Rs. 1,50,000

Loss on sale of first truck                      : Rs. 6,40,875


 
Dr.

Truck Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Oct 2001 Bank   20,00,000 March 2002 Depreciation   2,00,000
          Balance c/d   18,00,000
      20,00,000       20,00,000
               
April 2002 Balance b/d   18,00,000 March 2003 Depreciation   1,80,000
          Balance c/d   16,20,000
      18,00,000       18,00,000
               
April 2003 Balance b/d   16,20,000 March 2004 Depreciation for first truck for 3 months   21,375
Jan 2004 Bank   12,00,000   Depreciation for second truck for 9 months   64,125
          Depreciation for the new truck purchased for 2 months   20,000
        July 2003 Insurance settlement   6,00,000
          Loss on insurance settlement   2,33,625
        Dec 2003 Sale of second truck   1,50,000
          Loss on sale of second truck   6,40,875
        March 2004 Balance c/d   10,90,000
      28,20,000       28,20,000

 

Question-36

A Noida based Construction Company owns 5 cranes and the value of this asset in its books on April 01, 2001 is Rs. 40,00,000. On October 01, 2001 it sold one of its cranes whose value was Rs. 5,00,000 on April 01, 2001 at a 10% profit. On the same day it purchased 2 cranes for Rs. 4,50,000 each. Prepare cranes account. It closes the books on December 31 and provides for depreciation on 10% written down value.

Solution:
Working notes

Original value of the crane purchased in April 2001 : Rs. 5,00,000

Less depreciation @ 10% for 9 months                 : Rs. 37,500

WDV as on April 2002                                        : Rs. 4,75,000

Profit on sale of crane                                        : Rs. 47,500        

Dr.

Cranes Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
April 2001 Balance b/d   40,00,000 Dec 2001 Depreciation for cranes purchased in April 2001(9 months)   37,500
Oct 2001 Bank   9,00,000   Depreciation for machine purchased in Oct 2001(3 months)   22,500
Dec 2001 Profit and Loss (profit on sale of crane)   47,500 Oct 2001 Bank (Sale)   5,22,500
        Dec 2001 Balance c/d   41,65,000
      49,47,500       49,47,500

 

Question-37

Shri Krishan Manufacturing Company purchased 10 machines for Rs. 75,000 each on July 01, 2000. On October 01, 2002, one of the machines got destroyed by fire and an insurance claim of Rs. 45,000 was admitted by the company. On the same date another machine is purchased by the company for Rs. 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 2000 to 2003.

Solution:
Working Notes

Cost of machine purchased in July 2000      : Rs. 75,000

Less Depreciation @ 15%                         : Rs. 5,625

WDV as on Dec 2000                               : Rs. 69,375

Less Depreciation @ 15%                         : Rs. 10,406

WDV as on Dec 2001                               : Rs. 58,969

Less Depreciation @ 15% for 9 months      : Rs. 6,634

WDV as on Dec 2002                               : Rs. 52,335

Amount realized from insurance claims       : Rs. 45,000

Loss on insurance settlement                    : Rs. 7,335


 
Dr.

Machines Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
July 2000 Bank   7,50,000 Dec 2000 Depreciation   56,250
          Balance c/d   6,93,750
      7,50,000       7,50,000
Jan 2001 Balance b/d   6,93,750 Dec 2001 Depreciation   1,04,062
          Balance c/d   5,89,688
      6,93,750       6,93,750
Jan 2002 Balance b/d   5,89,688 Dec 2002 Depreciation for 9 months for one machine   6,634
Oct 2002 Bank (new machine purchased)   1,25,000   Depreciation for the remaining 9 machines   79,608
          Loss on sale of machine   7,335
          Depreciation for the new machine purchased for 3 months   4,687
          Insurance claims   45,000
          Balance c/d   571,424
      7,14,688       7,14,688
Jan 2003 Balance b/d   5,71,424 Dec 2003 Depreciation   85,714
          Balance c/d   4,85,710
      5,71,424       5,71,424

 

Question-38

On January 01, 2000, a Limited Company purchased machinery for Rs. 20,00,000. Depreciation is provided @15% p.a. on diminishing balance method. On March 01, 2002, one fourth of machinery was damaged by fire and Rs. 40,000 were received from the insurance company in full settlement. On September 01, 2002 another machinery was purchased by the company for Rs. 15,00,000. Write up the machinery account from 2002 to 2003. Books are closed on December 31, every year.

Solution:
                                                                                                                                                                                  
Dr.

Machines Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Jan 2000 Bank   20,00,000 Dec 2000 Depreciation   3,00,000
          Balance c/d   17,00,000
      20,00,000       20,00,000
               
Jan 2001 Balance b/d (4,25,000+12,75,000)   17,00,000 Dec 2001 Depreciation   2,55,000
          Balance c/d   14,45,000
      17,00,000       17,00,000
               
Jan 2002 Balance b/d (3,61,000+10,83,750)   14,45,000 March 2002 Depreciation for 3 months   13,547
Sep 2002 Bank   15,00,000   Insurance claims   40,000
          Loss on insurance settlement   3,07,703
          Depreciation for the remaining ¾ machinery   1,62,563
          Depreciation for the new machinery for 4 months   2,25,000
          Balance c/d   21,96,187
      29,45,000       29,45,000

 

Question-39

A Plant was purchased on 1st July, 2000 at a cost of Rs. 3,00,000 and Rs. 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 Rs. 1,50,000 on October 01, 2002 and on the same date a new Plant was installed at the cost of Rs. 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.

Solution:
Working notes

Original cost of the machine purchased in July 2000 : Rs. 3,00,000

Add installation charges                                       : Rs. 50,000

Total cost of the machine                                     : Rs. 3,50,000

Less depreciation @ 15%(6 months)                      : Rs. 26,250

Value of the machine as on Dec 2000                     : Rs. 3,23,750

Less depreciation @15%                                      : Rs. 52,500

Value of the machine as on Dec 2001                     : Rs. 2,71,250

Less depreciation @15% for 9 months                    : Rs. 39,375

Value of the machine as on Oct 2002                     : Rs. 2,31,875

Sale value                                                          : Rs. 1,50,000

Loss on sale of machine                                       : Rs. 81,875
 

Dr.

Machine Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
July 2000 Bank   3,00,000 Dec 2000 Balance c/d   3,50,000
  Bank (installation expenses)   50,000        
      3,50,000       3,50,000
               
Jan 2001 Balance b/d   3,50,000 Dec 2001 Balance c/d   3,50,000
      3,50,000       3,50,000
               
Jan 2002 Balance b/d   3,50,000 Dec 2002 Bank (Sale)   1,50,000
Oct 2002 Bank   4,00,000   Profit and Loss (Loss on sale)   81,875
          Provision for depreciation(1,18,125+15,000)   1,33,125
          Balance c/d   3,85,000
      7,50,000       7,50,000

 
Dr.

Provision for Depreciation Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2000 Balance c/d   26,250 Dec 2000 Depreciation   26,250
      26,250       26,250
               
Dec 2001 Balance c/d   78,750 Dec 2001 Balance b/d   26,250
          Depreciation   52,500
      78,750       78,750
               
Dec 2002 Balance c/d   1,18,125 Dec 2002 Balance b/d   78,750
          Depreciation   39,375
          Depreciation for the new machine purchased   15,000
      1,33,125       1,33,125
               

 

Question-40

An extract of Trial balance from the books of Tahiliani and Sons Enterprises on December 31 2005 is given below:

Name of the Account Debit Amount Credit Amount
Rs. Rs.

Sundry debtors. 50,000
Bad debts 6,000
Provision for doubtful debts 4,000
Additional Information:
• Bad Debts proved bad but not recorded amounted to Rs. 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.

 


Solution:
Journal entries

a) Bad debts a/c    Dr.                 2,000
         To Sundry Debtors                     2,000
(Being bad debts written off)

b) Provision for doubtful debts     4,000
           To Bad debts a/c                    4,000
(Being bad debts written off)

c) Profit and Loss a/c Dr.               7,840
     To Provision for doubtful debts          7,840

(Being short provision for doubtful debts charged to P&L a/c)


 
Dr.

Bad Debts Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2005 Balance b/d   2,000 Dec 2005 Provision for Bad and Doubtful debts   8,000
  Sundry Debtors   6,000        
      8,000       8,000

 

       

Dr.

Provision for bad and Doubtful Debts Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2005 Bad debts   8,000 Dec 2005 Balance b/d   4,000
  Balance c/d   3,840   P&L Account   7,840
      11,840       11,840

     

Dr.

Profit and Loss Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2005 Provision for Bad and Doubtful debts   7,840        
               

 

Balance Sheet

Liabilities

Amount

Assets

Amount
    Sundry Debtors           50,000
Less: Bad debts           2,000
                               48,000

Less Provision for bad
And doubtful debts   3,840
Doubtful debts

 

 

 

44,160

       

 

Question-41

The following information are extract from the Trial Balance of M/s Nisha traders on 31 December 2005.

 

Sundry Debtors 80,500
Bad debts 1,000
Provision for bad debts 5,000
Additional Information
Bad Debts Rs. 500
Provision is to be maintained at 2% of Debtors.
Prepare bad debts accound, Provision for bad debts account and profit and loss account.

 


Solution:
                                                       
Dr.

Bad Debts Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2005 Balance b/d   1,000 Dec 2005 Provision for Bad and Doubtful debts   1,500
  Sundry Debtors   500        
      1,500       1,500

 

Dr.

Provision for bad and Doubtful Debts Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2005 Bad debts   1,500 Dec 2005 Balance b/d   5,000
  Balance c/d   3,840   P&L Account   340
      5,340       5,340


 

Dr.

Profit and Loss Account

Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
Dec 2005 Provision for Bad and Doubtful debts   340        
               

 





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