Depreciation

Problems:

1. A firm purchased a machine for Rs. 120000 on 1-7-2014, another machine was purchased
for Rs. 150000 on 1-1-2015. The depreciation was provided on Fixed installment method
at 10%. On 1-7-2016 the first machine was sold for Rs. 75000 and on the same day a
new machine was purchased for Rs. 180000. Show Machinery A/c upto 31-12-2016.
2. Godavari company purchased a machine on 1-1-2012 for Rs. 27000 and paid Rs. 5000
for its erection charges. The scrap value is estimated Rs. 2000 after its useful life of 10
years. On 30-9-2015 machine was sold for Rs. 18000. Show machinery a/c.
3. X Ltd purchased a second hand machinery on 1-1-2010for Rs. 12000 and immediately
spent Rs. 8000 on overhauling. On July 1, 2010 the additional machinery machinery
costing Rs. 10000 purchased. On 1-7-2012, the machinery acquired on 1-1-2010 have
became obsolete was sold for Rs. 4000, on the same day another machinery was
purchased at a cost of Rs. 24000. Depreciation was provided annually on 31st December
at 10% p.a. on original cost method. Show machinery a/c from January 2010 to
December 2015.
4. A company purchased a second hand Motor Truck for Rs. 100000 on 1-4-2012 and paid
Rs. 20000 for its repairs and painting. A new truck was purchased for Rs. 200000 on 1-1-
2013. Another truck was purchased for Rs. 150000 on 1-7-2013. The depreciation was
provided at 10% on Written Down Value method. On 30-9-2014 the first truck was sold
for Rs. 90000. Prepare Motor Truck A/c upto 31-12-2014.
5. Coal India Ltd purchased a machine on 1-1-2012 for Rs. 36000 and paid installation
charges Rs. 4000. On 1-4-2013 another machine was purchased for Rs. 24000. On 30-6-
2014 the first machine which was purchased on 1-1-2012 was sold for Rs. 12450. On 1-
7-2014 acquired a new machine for Rs .48000. The company has been following the
calendar year as financial year. Write off depreciation at 10% p.a. under WDV method,
prepare machinery a/c for 4 years.
6. Tata Ltd purchased a machine for Rs. 50000 on 1-1-2000, they bought another machine
for Rs. 10000 on 1-7-2000. Yet another machine was acquired for Rs. 16000 on 1-1-
2004. The machine which was purchased on 1-7-2000 was sold for Rs. 5000 on 30-6-
2003. Show machinery a/c from 2000-2005, by depreciating the machine under DBM @
10% p.a.
7. On 1-4-2012 Moon Ltd purchased a Plant for Rs. 1000000. On 1-10-2012 additional
plant was purchasedfor Rs. 500000. On 1-10-2013 the plant purchased on 1-4-2012 was
sold for Rs. 400000. On 1-10-2014 a new plant was purchased for Rs.1200000 and the
plant purchased on 1-10-2012 was sold for Rs. 420000 on the same date. Depreciation is
to be provided at 10% p.a. on Written Down Value method on 31st March every year.
Prepare plant a/c for 3 years.
8. A firm took 5 years Lease for Rs. 150000. It decides to write-off depreciation on annuity
method. The rate of interest is 5% p.a. The annuity table shows that a sum of Rs. 3464.62
should be written-off every year. Show Lease A/c and P&L A/c for five years.
9. A lease purchased on 1-1-2011 for five yars at a cost of Rs. 5000000. It is proposed to
depreciate the lease by annuity method charging 5% interest. According to annuity table
to depreciate Re. 1 by annuity method charging 5% interest for 5 years a sum of Rs.
0.230975 should be written-off. Show lease account and Profit and Loss A/c.
10. A company acquires a lease costing Rs. 100000 for a term of 4 years. Annuity table
shows that in order to write-off the lease at 5% interest p.a the amount to be written-off
annually as depreciation amounts to Rs. 28201. Prepare lease a/c and P&L a/c for four
years.
 Unit – II
Provisions and Reserves

Provision
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.
Provision is an amount kept aside to meet known liability or expense or loss
relates to current year. It is a charge against current year profit to match the current year
expenses or losses. The amount of expense or loss will arise in future but amount cannot
be determined exactly.
For example, a trader who sells on credit basis knows that some of the debtors of
the current period would not pay or would pay partially. It is necessary to take into
account such an expected loss while calculating true profit or loss according to the
principle Conservatism. Therefore, the trader creates a Provision for Doubtful Debts to
take care of expected loss at the time of realisation from debtors.
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.
Reserves
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 contingencies. Unlike
provisions, reserves are the appropriations of profit to strengthen 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.
Examples of reserves are: • General reserve;
• Workmen compensation fund;
• Investment fluctuation fund;
• Capital reserve;
• Dividend equalisation reserve;
• Reserve for redemption of debenture
 Differences between Provision and Reserve

Types of Reserves

A reserve is 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, which is created for some specific
purpose and can be utilised only for that purpose. Examples of specific reserves are given below
(i) Dividend equalisation reserve (ii) Workmen compensation fund (iii) Investment fluctuation
fund (iv) Debenture redemption reserve etc.

3. Secret Reserve: Secret reserve is a reserve that do not appear in the balance sheet. It
can be created in the years of higher profits and can be merged with the profits during the lean
periods. Secret reserves can be created by (i) By undervaluing stock, (ii) By making excessive
provisions then the required, (iv) By showing contingent liabilities as actual liabilities of the
enterprise etc.
 Reserves are also classified as revenue and capital reserves according to the nature of the
profit out of which they are created.

1. Revenue reserves: Revenue reserves are created from revenue profits which arise out of
the normal operating activities of the business and are otherwise freely available for
distribution as dividend. Examples of revenue reserves are: • General reserve; • Workmen
compensation fund; • Investment fluctuation fund; • Dividend equalisation reserve; •
Debenture redemption reserve;
2. Capital reserves: Capital reserves are created out of capital profits which do not arise
from the normal operating 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 • 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

Journal Entries

1. For Baddebts written off

Baddebts A/c Dr
To Debtors A/c
2. For Baddebts transferred to Provision for Baddebts a/c
Provision for Baddebts A/c Dr
To Baddebts A/c
3. For balance in Provision for Baddebts transferred to P & L a/c
( if baddebts amount is more than provision)

P & L a/c Dr
To Provision for Baddebts a/c
OR
( if baddebts amount is less than provision)
Provision for Baddebts a/c Dr
To P & L a/c