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Provision for Repairs and Renewals Method

Repairs provision method not only takes the cost of the asset, but also the estimated cost of repairs to be effected during the useful life of the asset.

Method of Calculation

 

Accounting Treatment

The amount of depreciation is debited to the profit and loss account and credited to the provision for depreciation and repairs account. The actual amount incurred on repairs and renewals is debited to the provision for depreciation and repairs account. At the end of useful life of the asset, the provision for depreciation and repairs account is closed by transferring it to the asset account.
 

Illustration 12

A Ltd. purchased a machine for ₹ 30,000 on 1st April 2010 and incurred ₹ 10,000 towards freight, insurance, carriage inward and installation charges. It was estimated that its life is 4 years during which period a sum of ₹ 15,000 is likely to be spent on its repairs and maintenance and at the end of useful life, the scrap value will be ₹5,000. Actual repairs were as under:
 

2011—Nil; 2012—₹ 2,500; 2013—₹ 5,000; 2014—₹ 7,500

At the end of useful life, the scrap value of the machine realized ₹ 4,000 only.

 

Prepare the machinery account and provision for depreciation and repairs account.
 

Solution:
 


 


Working Note:

 

Calculation of the annual amount to be provided for depreciation:

 

Annual amount to be provided for depreciation
 

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