NOTES


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

Distinguish between Straight line method of depreciation and Written down value method of depreciation.



Ans.
Under straight line method an equal amount is written off each year throughout the working life of the depreciable tangible asset so as to reduce the cost of the asset to nil or to its scarp value at the end. Under reducing balance method, a fixed percentage is charged on the diminishing balance of the asset each year so as to reduce the value of the asset to its scarp value at the end of useful life. The basic distinction between these two methods are as follows: Under straight line method, annual depreciation charge is equal throughout the life of the asset; but under reducing balance method, depreciation charge is reduced over the years as the asset grows old. Under straight-line method, the asset can be fully depreciated but under reducing balance method asset can never be fully depreciated. Under straight line method the charge for depreciation is constant while repair charges increase with the life of the asset, so the total charge throughout the life of the asset will not be uniform. To the contrary, under reducing balance method, depreciation charges become high in the initial years but generally repair remains low. As the asset grows old depreciation charge reduces but repair expenses increase. Thus under reducing balance method depreciation and repairs are more or less evenly distributed throughout the life of the asset.

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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.
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  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.


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  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.
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  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.


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  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
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