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Concept of Depreciation:-
- Depreciation means diminution in the value or utility of asset due to normal wear and tear, efflux of time,
accident, obsolescence, and fall in market value, depletion or exhaustion or similar causes.
- Diminution means – decrease in market value of asset.
- Wear and Tear – Due to actual use of assets.
- Efflux Of time – Due to passage of time, even if assets are not used.
- Accident- Due to any causes like fire, etc.
- Obsolescence- Due to technological changes, improvement in production method, changes in market demand
for product and service and legal and other restriction.
- Exhaustion or Depletion- decrease in value of assets (natural resources) due to consumption i.e. coal mines,
etc.
- Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period
during the expected useful life of asset.
- Depreciation includes amortization of assets whose useful life is predetermined.
- Depreciation is charge against profit, it is immaterial whether business enterprises earned profit or not and
asset has been used or not.
- Depreciation is provided to ensure sufficient cash for assets replacement.
- Depreciation is process of allocation of cost of fixed assets.
Depreciable Assets:- are those which are expected to be used during more than one accounting period and
have limited useful life.
Objective for providing Depreciation:-
Prime objectives for providing Depreciation are:-
(1) Correct Income Measurement: - Depreciation should be charged for proper estimation of periodic Profit or
Loss.
(2) True position statement: - Depreciation should be charged to know actual financial position.
(3) Funds For replacement: - Charging depreciation help to General adequate fund in the hand of business for
replacement of asset at the end of its useful life.
(4) Determine True Cost of production:- For determining true Cost of production, it is necessary to charge
depreciation since it’s a item of cost.
Factors in the Measurement:-
Following factors require to be considered for calculating depreciation.
(1)Cost of assets including expenses for installation, commissioning, trial run etc.
(2)Estimated useful life of asset.
(3)Estimated scrap value (if any) at the end of useful life of asset.
(1) Cost of assets:-
Means money spent on acquisition, installation, cost of site preparation, delivery and handling charges, and
commissioning as well as on addition or improvement of assets.
(2) Useful life:-
(a) The period over which depreciable assets is expected to be used by enterprises.
(b) The total number of units expected to be produced or obtained from use of asset of enterprises.
Question 4: IOCM purchased on 1 Jan 2008 a machine for Rs. 2,40,000 and spent Rs 10,000 on its installation. On 1
October 2008, a new machine costing Rs 3,00,000 was purchased. On 1 April 2009, a new machine was purchased for
Rs. 1,00,000. On 1 July 2009, first machine became obsolete and sold for Rs 60,000. On the same day company
purchased a new machine for Rs 1, 50,000.
Depreciation was provided annually on 31 December @ 10%p.a. on the original cost of asset. In 2011, however, the
company changed the method of providing depreciation and adopted the method of writing off 15% on the written
down value. Prepare machinery A/C as it would stand at the end of each year from 2008 to 2011.
Question 5: X ltd purchased on 1 April 2008 a machine for Rs. 3,60,000. It was installed (put to use) on 1 July 2008 and
incurred Rs 40,000 as installation charge. On 1 Feb 2009 company purchased another machine for Rs. 2,00,000 and paid
Rs. 40,000 on its registration and Rs 10,000 as commission. On 31 Dec 2009 a second hand machine costing Rs 5,00,000
was purchased and incurred Rs 50,000 on its repair.
During 2010, on 1 April first machine became obsolete and auctioned it for Rs 80,000 and paid 10% commission on its
sale. On the same date a new machine costing Rs 2,40,000 was purchased .
On 31st Dec 2012, company decided to change the method of charging depreciation from WDV @ 10% to SLM. Prepare
machinery accounts from 2008 to 2012 assuming that accounts are closed each year on 31 December.
( HUM MEIN HAI DUM)
Question 8: On 1 Jan 2008, X ltd purchased a machine for Rs 5,00,000. On 1 July 2009, a new machine costing Rs
3,00,000 was purchased. On 1 October in same accounting year a new machinery costing Rs. 1,80,000 was purchased.
st
During 2010, on 1 December company purchased another machine for Rs 1,50,000. On 1 January, company sold its
first machine for RS 1,60,000. On 1 April 2012 second machine also became obsolete and sold it for Rs. 80,000.
Depreciation is charged @ 10 % on its diminishing value.
Prepare machinery A/C, provision for depreciation A/C and machine disposal A/C, assuming that accounts are closed
each year on 31st December
PRACTICE QUESTIONS
Question 10: On July1, 1997, A Co. Ltd. Purchases second-hand machinery for Rs. 60,000 and spent Rs. 9,000 on
reconditioning and installing it. On January 1,1998 the firm purchases new machinery worth Rs. 36000. On June
30,1999, the machinery purchased on January 1, 1998 was sold for Rs. 24,000 and on July 1, 1999 fresh plant was
installed. Payment for this plant was to be made as follows:
July 1,1999 15,000
June 30,2000 19,800
June30, 2001 17,400
Payment in 2000 and 2001 include interest of Rs.4,800 and Rs.2,400 respectively. The company writes off 10 % on the
s st
original Cost. The accounts are closed every year on 31 March. Show the Machinery Account for the year ending 31
March. 2000.
st
Question 11: X Co. Ltd. has plant and machinery which on 1 Jan. 1998 was entered in the ledger under two separate
account viz. Machinery Rs. 1,28,600 and Provision for Depreciation of Machinery Rs. 72,520. The company maintains a
machinery register showing full details. Depreciation is being charged @ 10% p.a. on cost. On 30.6.98 it was decided to
stop operation of a section of the plant immediately and sell its machinery ; this had been purchased on 1.1.1989 at a
cost (including erection) of Rs. 12,000. It was sold on 15.12.1998 to Alfa Ltd. for Rs. 1600 (ex-factory). The Cost of wages
for dismantling was Rs. 100. New and more efficient machinery was purchased from Bita Ltd. on 1.8.98 at a cost
(including erection) of Rs. 20,000. This new machinery commenced operation on 1.10.98. Open machinery account
provision for depreciation on machinery account and scraped machinery account..
( bas pyar ho gaya mujhe)
Question 12: P. Ltd. which depreciates its machinery at 10 % p.a. on Diminishing Balance Method, had on 1st January
2003 Rs.9,72,000 on the debit side of Machinery Account. During the year 2003, Machinery purchased on 1st January
2001 for Rs.80,000 was sold for Rs.45,000 on 1st July 2003 and a new machinery at a cost of Rs. 1,50,000 was
purchased and installed on the same date, installation charges being Rs.8,000. The Company wanted to change the
method of depreciation from Diminishing Balance Method to Straight Line Method with effect from 1st January 2001.
The rate of depreciation remains the same as before. Show Machinery Account.
Question 13: A Company had a balance of Rs.4,05,000 on 1st January, 2003 in its Machinery Account. 10 % p.a.
depreciation was charged by w.d.v method. On 1st July 2003, the company sold a part of machinery for Rs.87,500,
which was purchased on 1st January2001 for Rs. 1,20,000 as a part of it become useless, and on the same i.e., on 1st
July, 2003, the company purchased a new machine for Rs.2,50,000. On 31st December, 2003, the Directors of the
company decide to adopt the fixed installment method of deprecation from 1st January, 2001 instead of diminishing
balance method. The rate of depreciation will remain the same. Prepare machinery account in the books of Company
for the year ending 2003. [CA-Nov.2004]
Question 14: X Ltd. purchased on 1st January 2001 a second hand plant for Rs.60,000 and immediately spent Rs.40,000
in putting the same in working condition. On 1st July 2001 additional machinery costing Rs.40,000 was purchased. On
1st January 2003 the plant purchased on 1st January 2001 became obsolete and was sold for Rs.50,000. On 1st July
2003 new machinery was purchased at a cost of Rs. 1,20,000. The firm provided depreciation on straight line method at
10 % per annum on the original cost of the assets. In 2005 the company decided to provide depreciation on written
down value basis at 15% p.a. Show Machinery Account for the calendar years 2001 to 2005.
Question 15: Hanuman Enterprises purchased on 1.4.95 certain machinery for Rs.72,800 and paid Rs.2,200 on its
installation. On 1.10.95 another machinery for Rs.25,000 was acquired. On 1.4.96. the first machinery was sold at
Rs.50,000 and on the same date a fresh machinery was purchased at a cost of Rs.45,000. Depreciation was annually
provided on 31st March at 10 % p.a. on written down value. On 1.4.97, however, the firm decided to change the
method of providing depreciation and adopted the method of providing depreciation @ 10% p.a. on the original cost.
Ascertain the value of Machinery as on 31.3.98.
Question 16: On 1st January2001, X Ltd. purchased a machinery for Rs. 12,00,000. On 1st July 2003, a part of the
machinery purchased on 1st January, 2001 for Rs.80,000 was sold for Rs.45,000 and a new machinery at a cost of
Rs.1,58,000 was purchased and installed on the same date. The company has adopted the method of providing 10 %
p.a. depreciation on the original cost of the machinery.
Show the necessary ledger accounts assuming that (a) Provision for Depreciation Account is maintained (b) Provision
for depreciation Account is not maintained.
Question 17: (Provision For Depreciation, Sale of Asset and Change in Method From the Back Date)
On 1 April, 1998 a new plant was purchased for Rs. 80,000 and a further sum of Rs. 4,000 was spent on its installation.
On 1 October,2000 another plant was acquired for Rs. 50,000. Due to an accident on 3 January, 2001 the first plant was
totally destroyed and was sold for Rs. 2,000 only. On 21.1.2002 a second hand plant was purchased for Rs. 60,000 and
a further sum of Rs. 10,000 was spent for bringing the same to use on and from 15.3.2002. Depreciation has been
provided at 10 per cent on straight line basis. It was a practice to provide depreciation for full year on all acquisitions
made at any time during any year and to ignore depreciation on any item sold or disposed of during the year. None of
the assets were insured. The accounts are closed annually to 31 March. It is now decided to follow the rate of 20
percent on diminishing balance method. Required : (i) A Plant Account; (ii) Provision for Depreciation Account; (iii)
Journal Entries, where necessary.
Question 18:
Voltas Ltd. bought a truck on 1 January, 2000 for Rs. 60,000 and a sum of Rs. 20,000 was spent for various accessories.
On 1 July, 2001 another vehicle was purchased for Rs. 52,000. On 1 July 2002, the first truck was sold for Rs. 60,000. On
the same date, another truck was purchased for Rs. 50,000. On 1 July 2003, the second vehicle was sold for Rs. 46,000.
Rate of depreciation was 10% on the original cost annually on 31 December. In 2002 the method of charging
depreciation has changed to diminishing value method, on the balance existing on 31-12-2002 the rate being 15%. p.a
Prepare Truck Account for 2000, 2001, 2002 and 2003. [B.Com (Hons.)]
Answer:
Dr. Truck Account Cr.
2000 Rs. 2000 Rs.
Jan.l To Cash 60,000 Dec. 31 By Depreciation Account 8,000
To Cash (Accessories) 20,000 By Balance c/d 72,000
80,000 80,000
2001 2001
Jan.l To Balance b/d Dec. 31 By Depreciation Account
72,000 10,600
To Cash (Truck II) Truck I 8,000
52,000
Truck II 2,600
By Balance/d
1,13,400
2002 1,24,000 2002 1,24,000
Jan.1 To Balance b/d Julyl By Cash (Sale of Truck I)
To Cash (Truck III) 1,13,400 Dec. 31 By Depreciation Truck I (1) 60,000
50,000 By Depreciation Account (2) 4,000
By Balance c/d 11,160
88,240
2003 2003
Jan.l To Balance b/d 1,63,400 Julyl By Cash (Sale of Truck II) 1,63,400
Julyl To Profit Loss A/c Dec. 31 By Depredation (for 6 months) (3)
88,240 By Depreciation (Truck III) (4) 46,000
7,160 By Balance c/d 3,150
2004 6,938
Jan1 To Balance b/d 39,312
95,400 95,400
39,312
Working Notes