NOTES


CA-Foundation > Principles and Practice of Accounting > Concept and Accounting of Depreciation (Old & New)

M/s. Prabha Pharmaceuticals has imported a machine on 1st July, 2014, for Pound 8,000, paid custom duty and freight Rs.80,000 and incurred erection charges Rs.60,000. Another local machinery costing Rs.1,00,000 was purchased on 1st Jan 2015. On 1st July, 2016, a portion of the imported machinery (value one-third) got out of order and was sold for Rs.1,34,800. Another machinery was purchased to replace the same for Rs.50,000. Depreciation is to be calculated at 20% p.a on cost. Show the machinery account for 2014, 2015, and 2016. Exchange rate is Rs.80 per pound.



Ans.

Machinery A/c

Date

Particulars

amount

Date

particulars

amount

2014

 

 

2014

 

 

Jul-01

To Bank A/c

6,40,000

Dec-31

By Depreciation A/c for ½ yr.

78,000

Jul-01

To Bank A/c

80,000

Dec-31

By balance c/d

7,02,000

Jul-01

To Bank A/c

60,000

 

 

 

 

 

7,80,000

 

 

7,80,000

2015

 

 

2015

 

 

Jan-01

To balance b/d

7,02,000

Dec-31

By Depreciation A/c

1,56,000

Jan-01

To Bank A/c

1,00,000

Dec-31

By balance c/d

6,46,000

 

 

8,02,000

 

 

8,02,000

 

Date

Particulars

amount

Date

particulars

amount

2016

 

 

2016

 

 

Jan-01

To Balance b/d

6,46,000

Jul-01

By Bank A/c

1,34,000

 

To Bank A/c

50,000

Jul-01

By Depreciation A/c(on machinery sold)

   26,000

 

 

 

Jul-01

By Profit & Loss A/c

(Loss on sale of machinery)

    21,200

 

 

 

Dec-31

By Depreciation A/c

1,24,000

 

 

 

Dec-31

By balance c/d

3,90,000

 

 

6,96,000

 

 

6,96,000

 

Working Note:

1. In the absence of information about depreciation method to be used, Straight line method of depreciation has been used. Alternatively, written down value method of depreciation may be assumed.

2. The method of machinery sold as on 1.7.2016 may be obtained as follow:

 

Rs.

Cost of machinery sold as on 1.7.2014

2,60,000

Less: Depreciation for 2014 (for 1⁄2 year)

(26,000)

 

2,34,000

Less: Depreciation for 2015

(52,000)

 

1,82,000

Less: Depreciation for 2016 (for 1⁄2 year)

(26,000)

 

1,56,600

Less: Amount received

(1,34,800)

 

21,200

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Notes of Concept and Accounting of Depreciation (Old & New)



  1. Distinguish between Straight line method of depreciation and Written down value method of depreciation.
    see in detail

  2. A firm’s plant and machinery account at 31st December, 2015 and the corresponding depreciation provision account, broken down by year of purchase are as follows:

    Year of purchase

    Plant and machinery at cost

    Depreciation provision

     

    Rs.

    Rs.

    1998

    2,00,000

    2,00,000

    2004

    3,00,000

    3,00,000

    2005

    10,00,000

    9,50,000

    2006

    7,00,000

    5,95,000

    2013

    5,00,000

    75,000

    2014

    3,00,000

    15,000

     

    30,00,000

    21,35,000

    Depreciation is at the rate of 10% per annum on cost. It is the Company’s policy to assume that all purchases, sales or disposal of plant occurred on 30th June in the relevant year for the purpose of calculating depreciation, irrespective of the precise date on which these events occurred.

    During 2015 the following transactions took place:

    1. Purchase of plant and machinery amounted to Rs.15,00,000

    2. Plant that had been bought in 2004 for Rs.170,000 was scrapped.

    3. Plant that had been bought in 2005 for Rs.90,000 was sold for Rs.5,000.

    4. Plant that had been bought in 2006 for 2,40,000 was sold for Rs.15,000.

    You are required to: Calculate the provision for depreciation of plant and machinery for the year ended 31st December,2015. In calculating this provision you should bear in mind that it is the company’s policy to show any profit or loss on the sale or disposal of plant as a completely separate item in the Profit and Loss Account. You are also required to prepare the following ledger accounts during 2015.

    (i) Plant and machinery at cost;

    (ii) Depreciation provision;

    (iii) Sales or disposal of plant and machinery.


    see in detail

  3. The Machinery Account of a Factory showed a balance of Rs.19,00,000 on 1st January, 2015. Its accounts were made up on 31st December each year and depreciation is written off at 10% p.a. under the Diminishing Balance Method.

    On 1st June 2015, a new machinery was acquired at a cost of Rs.2,80,000 and installation charges incurred in erecting the machine works out to Rs.8,920 on the same date. On 1st June, 2015 a machine which had cost Rs.4,37,400 on 1st January 2013 was sold for Rs.75,000. Another machine which had cost Rs.4,37,000 on 1st January, 2014 was scrapped on the same date and it realised nothing.

    Write a plant and machinery account for the year 2015, allowing the same rate of depreciation as in the past calculating depreciation to the nearest multiple of a Rupee.
    see in detail

  4. M/s. Prabha Pharmaceuticals has imported a machine on 1st July, 2014, for Pound 8,000, paid custom duty and freight Rs.80,000 and incurred erection charges Rs.60,000. Another local machinery costing Rs.1,00,000 was purchased on 1st Jan 2015. On 1st July, 2016, a portion of the imported machinery (value one-third) got out of order and was sold for Rs.1,34,800. Another machinery was purchased to replace the same for Rs.50,000. Depreciation is to be calculated at 20% p.a on cost. Show the machinery account for 2014, 2015, and 2016. Exchange rate is Rs.80 per pound.


    see in detail

  5. The LG Transport company purchased 10 trucks at Rs.45,00,000 each on 1st April 2014. On October 1st, 2016, one of the trucks is involved in an accident and is completely destroyed and Rs.27,00,000 is received from the insurance in full settlement. On the same date another truck is purchased by the company for the sum of Rs.50,00,000. The company write off 20% on the original cost per annum. The company observe the calendar year as its financial year.

    Give the motor truck account for two year ending 31 Dec, 2017
    see in detail


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