g1 4 accounting for depreciation [d01-j14]

Depreciation Methods of Depreciation & Methods of

Accounting of Depreciation

Comprehensive idea about depreciation including reasons for depreciation, thirteen methods

of depreciation, three methods of accounting of depreciation and accounting standard 6

T K Sridhar [Singar Academy]

Financial Accounting 4.1

l.4 ACCOUNTING FOR DEPRECIATION

[CMA FOUNDATION D01, 4 Marks]

Question 1: Write short notes on Depreciation.

Answer: Depreciation is a loss in value of an Asset. It is measure of wearing out, consumption, or other

loss in value of Depreciable Asset arising from use and passage of time. As per IAS4 - ‚Depreciation is the

allocation of the depreciable amount of an asset over its estimated useful life.‛

Depreciation Accounting: Depreciation Accounting is the process of allocation and not valuation.

[CMA INTER SY08, D12, 3 Marks]

Question 2: State the criteria which should be fulfilled by a depreciable asset as per AS6

Answer: Depreciable Assets are assets which are:

used during more than one year

having a limited useful life

held by an enterprise for use in :

o the production or supply of goods and services

o for renting to others

o for administrative purposes

o not for the purpose of sale in the ordinary course of business.

Question 3: What is depreciable amount?

Answer: Depreciable amount = historical cost – scarp value

Depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting

period during its useful life.

[CMA INTER J09, 5 Marks]

Question 4: What are the objectives of charging depreciation and problems of measurement of

depreciation? Explain.

Answer: 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: Value of the fixed assets should be adjusted for depreciation charged in

order to depict the actual financial position.

Accounting for Depreciation 4.2

3. Funds for replacement: Generation of adequate funds in the hands of the business for replacement of

the asset at the end of its useful life.

4. Ascertainment of true cost of production: For ascertaining the cost of the production, it is necessary

to charge depreciation as on item of cost of production.

Question 5: What is the nature of depreciation?

1. Depreciation is non-cash operating expense which is to be provided whether there are profits or

losses.

2. Depreciation is concerned with historical cost and not with the fluctuations in market price.

Question 6: What are the Causes of Depreciation?

1. Physical wear and tear. [permanent and continuous decrease in the book value of fixed assets due to

use]

2. Effluxion of time [Passage of time]

3. Obsolescence [out-dated] [the economic deterioration by change in technology or taste or fashion]

4. Depletion [physical deterioration of natural resources like ore deposits in mines, oil wells]

5. Changes in economic environment

6. Expiration of legal rights.

Question 7: What is amortization and dilapidation?

Answer: Amortization refers to the economic deterioration of intangible assets like goodwill, patent

obsolescence.

Dilapidation - In one sentence Dilapidation means a state of deterioration due to old age or long use.

This term refers to damage done to a building or other property during tenancy.

Question 8: What are the factors affecting Amount of Depreciation

1. Historical Cost

2. Expected Useful life

3. Estimated Residual Value.

Note: All expenses incurred till the asset is put to use are treated as capital nature and hence form part of

historical cost.

Problems of measurement of depreciation are:

1. Estimated useful life may be incorrect and misleading.

2. Certain uncertain factors affect predetermined quantum of depreciation.


Question 9: What are the methods of recording depreciation?

Answer:

Two Methods of Recording Depreciation

By Charging to Asset A/c By Creating Provision for Depreciation A/c

1 Depreciation is credited to Asset A/c Depreciation is credited to Provision for

Depreciation A/c

2 Asset appears at its Written down Value

(i.e. Cost less depreciation till date)

Asset appears at its Original Cost.

Question 10: Most Commonly Employed 2 Methods of Providing Depreciation

1. Straight Line Method (SLM)

2. Written Down Value (WDV) Method

Question 11: Write short note disclosure requirements as per AS6

Answer:

The historical cost of each class of assets;

Total depreciation for the period.

The related accumulated depreciation;

Depreciation methods used; and

Depreciation rates (if they are different from the principal rates specified in the statute governing the

enterprise.)

Question 12: Distinction between Straight Line Method and Written Down Value Method

Straight Line Method differs from Written Down Value Method in the following respects:

Basis of

Distinction

Straight Line Method Written Down Value Method

1. Basis of

Calculation

Depreciation is calculated at a fixed

percentage on the original cost.

Depreciations is calculated at a fixed

percentage on original cost (in first year)

and on written down value (in subsequent

years).

2. Amount of

Depreciation

The amount of depreciation

remains constant

The amount of depreciation goes on

decreasing.


3. Total Charge

(i.e.

Depreciation

plus repairs)

Total charge in later years is more

as compared to that in earlier years

since renewals goes on increasing

as the asset grows older, whereas

the amount of depreciation remains

constant year after year.

Total charge remains almost uniform year

after year, since in earlier years the amount

of depreciation is more and the amount of

repairs and renewals is less whereas in

latter years, the amount of depreciation is

less and the amount of repairs & renewals is

more.

4. Book Value The book value of the asset

becomes zero or equal to its scrap

value.

The book value of the asset does not

become zero.

5. Suitability This method is suitable for those

assets in relation (a) repair charges

are less (b) the possibility of

obsolescence is less

This method is suitable for those assets in

relation to which (a) the amount of repairs

& renewals goes on increasing as the asset

grows older and (b) the possibility of

obsolescence are more.

6. Calculation –

Easy or difficult

It is easy to calculate the rate of

depreciation

It is difficult to calculate the rate of

depreciation.

Question 13: How to calculate amount and rate of depreciation under various methods?

Method of

Depreciation

Calculation of Amount of Depreciation (D)

and Rate of Depreciation (r)

Time Base

1 Straight Line Method

(SLM) or Fixed

Installment Method

Depreciation =

Rate of Depreciation =

×100

2 Written Down Value

(WDV) Rate of Depreciation =1 – √

%

Where, n = Useful life of the asset (in years)

Amount of Depreciation = Book Value of the Asset × rate of

Depreciation

3 Double Declining

Method (or)

Accelerated

Depreciation

Depreciate two times when the assets are used for extra shift (or)

Accelerated rate of depreciation = Rate of depreciation in SLM ×

Accelerate %

Note: Accelerated may be 150%, 200% etc., depending upon the

additional use of the asset


4 Sum of Years’ Digits Rate of Depreciation

for 1st year =

for 2nd year =

for 3rd year =

.

.

for nth year =

Where

Sum of Year’s Digits =

‘n’ refers to useful life of the asset (in years).

Amount of Depreciation = (Original Cost Less Estimated Scrap

Value) × Respective Rate of Depreciation for the given year.

Source of Fund Base

Sinking Fund Factor

[SFF]

*where, ‘i’ is the rate of interest & ‘n’ is the life in years]

Annuity Factor [AF]

*where, ‘i’ is the rate of interest & ‘n’ is the life in years]

Present Value Factor

[PVF]

*where, ‘i’ is the rate of interest & ‘n’ is the life in years+

5 Sinking Fund or

Depreciation Fund

Depreciation = Amount required for replacement of the asset × SFF

6 Annuity Depreciation = (Original Cost – PVF × Scrap Value) × Annuity Factor

Note: Under Annuity Method, interest is provided each year on the

balance of asset and fixed amount of depreciation is charged each year.

Suitable for financial lease.

7 Insurance Policy Depreciation = Insurance Premium p.a.

Use Base

8 Depletion Rate of depreciation per unit =

Depreciation = Actual Output (in units) × Depreciation p.u.

9 Machine Hour Depreciation per machine hour=

Depreciation= Actual Hours × Rate of Depreciation per Hour


10 Production Units Depreciation per unit =

Depreciation = Actual Production Units × Depreciation p.u.

11 Kilo meter Depreciation per unit =

Depreciation = Actual kilo meter × Depreciation p.k.m.

Price Base


Question: Write short notes on revaluation method of depreciations.

12 Revaluation Method Depreciation = Opening Value + Purchases – Closing Value

Note: Suitable for loose tools

13 Provision for Repairs

& Renewals

Depreciation =

Question 14: When can a Change in Method of Depreciation be made?

Answer: If adoption of new method is required

1. By Statue.

2. To comply with accounting standard.

3. To have more appropriate preparation & presentation of financial statements of enterprise

Question 15: Write a note on accounting for the retrospective effect in case of change in method of

depreciation.

Answer: Depreciation should be recalculated as per new method from the date of asset coming into use.

Treatment of Deficiency: The deficiency should be debited to Statement of Profit & Loss

Treatment of Surplus: The surplus should be credited to Statement of Profit & Loss.


Question 16: Distinguish between depreciation and reserve.

Answer: Depreciation is the process of allocating the cost of a Fixed Asset over its estimated useful life in

a rational and systematic manner, whereas Reserve is an appropriation of profit. Due to depreciation, net

profit is reduced but Reserve does not affect the net profit. Reserves are created to strengthen financial

position and to meet unforeseen losses, whereas depreciation is provided to ascertain the correct profit

and correct book value of fixed asset. Reserves are the undistributed profits and belong to the owner’s

equity. Depreciation is a rational estimate of a decline in the usefulness of an Asset due to consumption,

use, passage of time, technological changes etc.


True or false

1. The useful life of a depreciable asset is the period over which the asset is expected to be used by the

enterprise, which is generally greater than the physical life.1 [CMA INTER SY08, D13, 1 Mark]

2. Sinking fund method of depreciation takes into account the cost of an asset as well as interest also

thereon at given rate.2 [CMA INTER SY08, J13, 1 Mark]

3. One of the objectives achieved by providing depreciation is saving cash resources for future

replacement of assets.3 [CMA INTER SY08, J12, 1 Mark]

4. There exists difference between the Written Down Value method and Diminishing Balance Method of

depreciation.4 [CA-CPT N96 & Similar N00, 2 Marks]

5. The expressions – depreciation is to be charged at 10% and 10% p.a. on furniture and fittings carry the

same meaning.5 [CA-CPT M97, 2 Marks]

6. Higher depreciation will not affect cash profit of the business.6 [CA-CPT M99 & Similar N02, 2

Marks]

7. Land is also depreciable assets.7 [CA-CPT M01, 2 Marks]

8. Depreciation is a process of allocation of the cost of fixed asset.8 [CA-CPT N03, 2 Marks]

Fill in the blanks

1. One of the characteristics of depreciation is that it is a _________ against profit [charge,

appropriation]9 [CMA INTER SY08, D13, 1 Mark]

PRACTICAL PROBLEMS

Calculation of Amount of Depreciation under SLM, WDV, DDM and SDY

Question 1: Calculate amount of depreciation under Straight Line Method, Written Down Value Method,

Sum of the Years’ Digits Method and Double Decline Method

Original Value of the Asset – ₹65,000

1 False – useful life is always shorter than physical life 2 False – sinking fund considers interest for the reinvestment not as a charge but in annuity method of

depreciation, interest on investment in assets is considered as a charge. 3 True – the amount of depreciation is accumulated in a separate fund called sinking fund. 4 False – Both are the same methods. Depreciation is computed by applying a fixed rate on the diminish

balance which is known as written down value. 5 False – They differ on the basis of time factor. 10% p.a. implies that time factor is to be considered while

calculating depreciation. Whereas simply 10% implies that time factor is immaterial for calculation. 6 True – it is a non-cash expenses 7 False – Land is not a depreciable asset except if the useful life of the land is given. 8 True 9 Charge


Scrap Value of the Asset – ₹5,000

Life – 3 years

Answer: Calculation of rate of depreciation under different methods

SLM WDV DDM SDM

Yr Formula ‘d’

% 1-√

%

Depreciation

rate of SLM × 2

1

%

% = 30.77% 1-√

%=57.47%

30.77×2 = 61.54% 2

%

3

%

Where: Sum of Year’s Digits =

Year Particulars SLM WDV DDM SDM

0 Original Value 65,000 65,000 65,000 65,000

1 Depreciation 20,000 37,356 40,000 30,000

1 Written Down Value 45,000 27,644 25,000 35,000

2 Depreciation 20,000 15,887 15,385 20,000

2 Written Down Value 25,000 11,757 9,615 15,000

3 Depreciation 20,000 6,757 4,6151 10,000

3 Scrap Value 5,000 5,000 5,000 5,000

Journal Entries SLM WDV DDM SYD

Debit Credit Debit Credit Debit Credit Debit Credit

0 Assets A/c Dr 65,000 65,000 65,000 65,000

To Cash A/c 65,000 65,000 65,000 65,000

1

Depreciation A/c Dr 20,000 37,356 40,000 30,000

To Assets 20,000 37,356 40,000 30,000

Profit and Loss A/c Dr 20,000 37,356 40,000 30,000

1 Last year, depreciation is the balancing charge to make it equal to scrap value


To Depreciation 20,000 37,356 40,000 30,000

2


To Assets 20,000 15,887 15,385 20,000


To Depreciation 20,000 15,887 15,385 20,000

3


To Assets 20,000 6,757 4,615 10,000


To Depreciation 20,000 6,757 4,615 10,000

Cash A/c Dr 5,000 5,000 5,000 5,000

To Assets A/c 5,000 5,000 5,000 5,000

Calculation of Amount of Depreciation under depletion method

Question 2: Pensive Corporation’s subsidiary Pensive Oil drills a well with the intention of extracting oil

from a known reservoir. It incurs the following costs related to the acquisition of property and

development of the site:

₹

Land purchase 2,80,000

Road construction 23,000

Drill pad construction 48,000

Drilling fees 1,92,000

Total 5,43,000

In addition, Pensive Oil estimates that it will incur a site restoration cost of ₹57,000 once extraction is

complete, so the total depletion base of the property is ₹600,000.

Pensive’s geologists estimate that the proven oil reserves that are accessed by the well are 400,000 barrels.

Pensive Oil extracts 100,000 barrels and 3,00,000 barrels in the first and second year

Answer: Rate of depreciation per unit =

=

= ₹1.50

Year Particulars ₹

0 Original Value with provision for site restoration cost 6,00,000


1 Depreciation 1,00,000 barrels × ₹1,50 1,50,000

1 Written Down Value 4,50,000

2 Depreciation 3,00,000 barrels × ₹1,50 4,50,000

2 Written Down Value 0

Journal Entries Debit Credit

0 Assets A/c Dr 5,43,000

To Cash A/c 5,43,000

1

Depreciation A/c Dr 1,50,000

To Assets 1,50,000

Profit and Loss A/c Dr 1,50,000

To Depreciation 1,50,000

2

Depreciation A/c Dr 4,50,000

To Assets 4,50,000

Profit and Loss A/c Dr 4,50,000

To Depreciation 4,50,000

Asset A/c Dr 57,000

To Cash 57,000

(Asset restoration cost)

Question 3: On 01.04.2012, machine purchased at ₹5,00,000 with a scrap value of ₹1,00,000 has life of

running 2,00,000 machine hours or producing 1,00,000 units

Year Machine Hours Production Units

2012-13 50,000 25,000

2013-14 1,00,000 50,000

2014-15 50,000 25,000

Calculate amount of depreciation under machine hour rate and production unit rate

Answer:

Method Formula Calculation

1 Machine Hour Rate

₹2


2 Production Unit Rate

₹4

Year Particulars Machine Hour Production Unit

0 Original Value 5,00,000 5,00,000

1 Depreciation 50,000×₹2 1,00,000 25,000×₹4 1,00,000

1 Written Down Value 4,00,000 4,00,000

2 Depreciation 1,00,000×₹2 2,00,000 50,000×₹4 2,00,000

2 Written Down Value 2,00,000 2,00,000

3 Depreciation 50,000×₹2 1,00,000 25,000×₹4 1,00,000

3 Scrap Value 1,00,000 1,00,000

Question 4: On 01.04.2012, lorry purchased at ₹25,00,000 with a scrap value of ₹5,00,000 has life of

running 2,00,000 kilo meters

Year Kilo meters

2012-13 80,000

2013-14 80,000

2014-15 40,000

Calculate amount of depreciation under kilo meter travelled method

Answer:

Method Formula Calculation

Depreciation per kilo meter

₹10

Year Particulars Machine Hour

0 Original Value 25,00,000

1 Depreciation 80,000×₹10 8,00,000


2 Depreciation 80,000×₹10 8,00,000


3 Depreciation 40,000×₹10 4,00,000

3 Scrap Value 5,00,000


Question 5: On 01.01.10, An asset is purchased for ₹1,00,000 has a residual value of ₹20,000 at the end of

3rd year. Expected cost for repairs and renewal during the life is ₹70,000. Actual repair costs are ₹20,000,

₹25,000 and ₹30,000 in the years I, II and III respectively. At end of third year, the asset is sold for ₹15,000.

Answer: Depreciation under Provision for Repairs & Renewals

Formula Calculation

Depreciation

50,000


0 Assets A/c Dr 1,00,000


1 Depreciation A/c Dr 50,000

To Provision for repairs A/c 50,000

Profit and Loss A/c Dr 50,000

To Depreciation 50,000

Repairs A/c Dr 20,000

To Cash A/c 20,000

Provision for repairs A/c Dr 20,000

To Repairs A/c 20,000






To Cash A/c 25,000









To Cash A/c 30,000



Cash A/c Dr 15,000

Provisions for repairs A/c Dr 75,000

Loss on sale A/c Dr 20,000

To Assets 1,00,000

Dr. Assets A/c Cr.

Date Particular Amount Date Particular Amount

01.01.10 To Bank – Purchase 1,00,000 31.12.10 By Balance c/d 1,00,000

1,00,000 1,00,000

01.01.11 Balance b/d 1,00,000 31.12.11 Balance c/d 1,00,000

1,00,000 1,00,000

01.01.12 Balance b/d 1,00,000 31.12.12 Cash A/c 15,000

Provision A/c 75,000

Loss on Sale 10,000

1,00,000 1,00,000

Dr. Provision for repairs, renewal and depreciation A/c Cr.


31.12.10 To Repairs A/c 20,000 31.12.10 By Profit and Loss A/c 50,000

Balance c/d 30,000

50,000 50,000

01.01.11 Repairs A/c 25,000 01.01.11 Balance b/d 30,000

31.12.11 Balance c/d 55,000 01.10.11 Profit and Loss A/c 50,000

80,000 80,000

31.12.12 Repairs A/c 30,000 01.01.12 Balance b/d 55,000

Asset A/c 75,000 01.10.12 Profit and Loss A/c 50,000

1,05,000 1,05,000


Question 6: The value of loose tools available on 01.04.2013 is ₹ 1,00,000. Loose tools are purchased

during 2013-14 are ₹50,000. The value of loose tools as per revaluation on 31.03.2014 is ₹75,000. Find out

the depreciation under revaluation method.

Answer:

Depreciation Opening Value + Purchases – Closing Value

Depreciation 1,00,000 + 50,000 – 75,000 75,000


0 Loose Tools A/c Dr 50,000

To Cash A/c 50,000

1

Depreciation A/c Dr 75,000

To Loose Tools 75,000



Question 7: Asset purchased for ₹1,00,000, ₹50,000 and ₹2,00,000 on 1.1.2010, on 1.10.2011 and on 1.1.2012

respectively. On 1.10.2011, the asset purchased on 1.1.2010 was sold for ₹70,000. The rate of depreciation

of the above assets is 10% under straight line method. Prepare assets a/c under different methods of

accounting for the treatment of depreciation.

Answer: Method I [Charging depreciation to asset a/c]

Journal Entries SLM

Date Debit Credit

01.01.10 Assets A/c Dr 1,00,000


31.01.10


To Assets 10,000



01.07.11 Assets A/c Dr 50,000

To Cash A/c 50,000

01.10.11 Cash A/c Dr 70,000


Loss on Sale A/c Dr 12,500


To Assets A/c 90,000

31.12.11


To Assets 1,250



01.01.12 Assets A/c Dr 2,00,000


3


To Assets 25,000



Dr. Assets A/c Cr.


01.01.10 To Bank – Purchase 1,00,000 31.12.10 By Depreciation –

(₹1,00,000 ×10/100)

10,000

Balance c/d 90,000

1,00,000 1,00,000

01.01.11 Balance b/d 90,000 01.10.11 Depreciation 7,500

01.07.11 Bank – Purchase 50,000 (₹1,00,000 ×10/100×9/12)

P/L A/c [Loss] 12,500

Cash 70,000

31.12.11 Depreciation 1,250

(₹50,000×10/100×3/12)

Balance c/d 48,750

1,40,000 1,40,000


Bank- Purchase 2,00,000 (₹2,50,000×10/100)


Balance c/d 2,23,750

2,48,750 2,48,750

01.01.13 2,23,750

Method II [Provision for depreciation method]

Journal Entries SLM

Date Debit Credit

01.01.10 Assets A/c Dr 1,00,000


31.01.10


To Provision for Depreciation A/c 10,000



01.07.11 Assets A/c Dr 50,000

To Cash A/c 50,000

01.10.11



Cash A/c Dr 70,000


Provision for Depreciation A/c Dr 17,500

To Assets A/c 1,00,000

31.12.11





01.01.12 Assets A/c Dr 2,00,000


31.12.12 Depreciation A/c Dr 25,000





Dr. Assets A/c Cr.



1,00,000 1,00,000

01.01.11 Balance b/d 1,00,000 01.10.11 Provision for depreciation 17,500

01.10.11 Bank – Purchase 50,000 P/L A/c [Loss] 12,500

Cash 70,000

31.12.11 Balance c/d 50,000

1,50,000 1,50,000

01.01.12 Balance b/d 50,000 31.12.12 Balance c/d 2,50,000

Bank- Purchase 2,00,000

2,50,000 2,50,000

01.01.13 2,50,000

Dr. Provision for Depreciation A/c Cr.


31.12.10 To Balance c/d 10,000 31.12.10 By Depreciation 10,000

(₹1,00,000 ×10/100)

10,000 10,000

01.01.11 Assets A/c 17,500 01.01.11 Balance b/d 10,000


(₹1,00,000 ×10/100×9/12)


(₹50,000 ×10/100×3/12)

18,750 18,750

31.12.12 Balance c/d 26,250 01.01.12 Balance b/d 1,250



(₹2,50,000 ×10/100)

26,250 26,250

01.01.13 Balance b/d 26,250

Method III [Provision for depreciation method and disposal of assets a/c]

Journal Entries

SLM

Date Debit Credit

01.01.10 Assets A/c Dr 1,00,000


31.01.10





01.07.11 Assets A/c Dr 50,000

To Cash A/c 50,000

01.10.11



Asset Disposal A/c Dr 1,00,000

To Asset A/c 1,00,000

Cash A/c Dr 70,000


Provision for Depreciation A/c Dr 17,500

To Assets Disposal A/c 1,00,000

31.12.11





01.01.12 Assets A/c Dr 2,00,000



31.12.12





Dr. Assets A/c Cr.



1,00,000 1,00,000

01.01.11 Balance b/d 1,00,000 01.10.11 Assets Disposal A/c 1,00,000

01.10.11 Bank – Purchase 50,000 31.12.11 Balance c/d 50,000

1,50,000 1,50,000

01.01.12 Balance b/d 50,000 31.12.12 Balance c/d 2,50,000

Bank- Purchase 2,00,000

2,50,000 2,50,000

01.01.13 2,50,000




(₹1,00,000 ×10/100)

10,000 10,000

01.01.11 Assets Disposal 17,500 01.01.11 Balance b/d 10,000


₹1,00,000 ×10/100×9/12


(₹50,000 ×10/100×3/12)

18,750 18,750




(₹2,50,000 ×10/100)

26,250 26,250

01.01.13 Balance b/d 26,250

Dr. Assets Disposal A/c Cr.


01.10.11 To Assets 1,00,000 01.01.11 By Provision for depreciation 17,500

Profit and Loss A/c [loss] 12,500

Cash A/c 70,000

100,000 100,000

Question 8: A plant and machinery was purchased on 01.04.2010 for ₹1,20,000. The plant and machinery

had a life of 3 years with the residual value of ₹20,000. Calculate amount of depreciation, pass journal

entries and prepare ledger a/c under

1. Sinking fund method

2. Annuity method and

3. Insurance Policy Method

Assume the rate of interest of 10% p.a. for sinking fund method and annuity method. Insurance premium

is payable at ₹ 30,000 p.a. at the beginning of every year.

Also rework under the insurance policy method, assuming the asset was destroyed at the end of the

second year and salvage value recovered was ₹30,000. The insurance claim receivable is ₹90,000

Answer:

Formula Calculation

Sinking Fund Factor

0.30211

Annuity Factor

0.40211

Present Value

Factor

0.7513

Calculation of Amount of Depreciation

1 Sinking Fund Amount required for replacement ×

SFF

(1,20,000–20,000)×0.30211 30,211

2 Annuity (Original Cost – PVF × Scrap Value) (1,20,000 – 20,000× 0.7513) 42,211


× Annuity Factor × 0.40211

3 Insurance Policy Insurance Premium 30,000

Method I: Sinking Fund Method

Year Journal Entries Debit Credit

0 Plant and Machinery A/c Dr 1,20,000

To Bank A/c 1,20,000

1


To Depreciation Fund Reserve A/c 30,211

Depreciation Fund Investment A/c Dr 30,211

To Bank A/c 30,211

2

Bank A/c Dr 3,021

To Interest on Depreciation Fund Investment A/c 3,021


Interest on Depreciation Fund Investment A/c Dr 3,021


Depreciation Fund Investment A/c Dr 33,232

To Bank A/c 33,232

3

Bank A/c Dr 6,344

To Interest on Depreciation Fund Investment A/c 6,344


Interest on Depreciation Fund Investment A/c Dr 6,344


Bank A/c Dr 63,443

To Depreciation Fund Investment A/c 63,443

Bank A/c Dr 20,000

Depreciation Fund Reserve A/c Dr 1,00,000

To Assets A/c 1,20,000


Method II: Annuity Method

Year Journal Entries Debit Credit

0 Plant and Machinery A/c Dr 1,20,000


1

Plant and Machinery A/c Dr 12,000

To Interest A/c 12,000


To Plant and Machinery A/c 42,211


To Depreciation A/c 42,211

2







3







Assets A/c Dr 20,000

To Bank A/c 20,000

Method III: Insurance Policy Method

Year Narration Journal Entries Debit Credit

0 Asset purchased Plant and Machinery A/c Dr 1,20,000


1 Premium Paid Depreciation Insurance Policy A/c Dr 30,000


To Bank A/c 30,000

Provision created Depreciation A/c Dr 30,000

To Depreciation Provisions A/c 30,000

Depreciation

transferred to P/L a/c



2

Premium Paid Depreciation Insurance Policy A/c Dr 30,000

To Bank A/c 30,000



Depreciation




3


To Bank A/c 30,000



Depreciation




Policy realized Bank A/c Dr 1,00,000

To Depreciation Insurance Policy A/c 1,00,000

Profit on policy transferred Depreciation Insurance Policy A/c Dr 10,000

To Depreciation Provision A/c 10,000

Asset sold

Bank A/c Dr 20,000

Depreciation Provision A/c Dr 1,00,000


Dr. Assets A/c Cr.



1,20,000 1,20,000

01.04.11 Balance b/d 1,20,000 31.03.12 Balance c/d 1,20,000


1,20,000 1,20,000

01.04.12 Balance b/d 1,20,000 31.03.13 Bank A/c 20,000

Provision for Depreciation 1,00,000

1,20,000 1,20,000






60,000 60,000

31.12.12 01.04.12 Balance b/d 60,000


31.03.12 Insurance Policy 10,000

1,00,000 1,00,000

Method III: Insurance Policy Method assuming the asset destroyed in second year

Year Narration Journal Entries Debit Credit

0 Asset purchased Plant and Machinery A/c Dr 1,20,000


1


To Bank A/c 30,000



Depreciation




2 Premium Paid

Depreciation Insurance Policy A/c Dr 30,000

To Bank A/c 30,000




Depreciation




Policy realized Bank A/c Dr 90,000

To Depreciation Insurance Policy A/c 90,000

Profit on policy transferred Depreciation Insurance Policy A/c Dr 30,000

To Depreciation Provision A/c 30,000

Asset sold

Bank A/c Dr 30,000

Depreciation Provision A/c Dr 90,000


[CMA RTP J11]

Question 9: M/s Suba chemicals has imported a machine on 1st July 2007 for $ 6,000 paid customs duty

and freight ₹52,000 and incurred erection charges ₹20,000. Another local machinery costing ₹ 1,00,000

was purchased on January 1, 2008. On 1st July 2009, a portion of the imported machinery (value one-third)

got out of order and was sold for ₹34,800. New Machinery was purchased to replace the same for ₹50,000.

Depreciation is to be calculated at 20% p.a. on straight-line method. Prepare the Machinery Account and

Machinery Disposal Account for 2007, 2008 and 2009. Exchange rate is ₹38 per $

Answer:

Dr. Machinery Account – Books of M/s. Suba Chemicals Cr.


01.07.07 To Bank – Purchase 2,28,000 31.12.07 By Depreciation –

(₹3,00,000 ×20/100×1/2)

30,000

Bank – Duty etc. 52,000 Balance c/d 2,70,000

Bank – Erection 20,000

3,00,000 3,00,000

01.01.08 Balance b/d 2,70,000 31.12.08 Depreciation

Bank – Purchase 1,00,000 i. 3,00,000 × 20/100 60,000

ii. 1,00,000 × 20/100 20,000


3,70,000 3,70,000

01.01.09 Balance b/d 2,90,000 01.07.09 Machinery disposal A/c 60,000


Depreciation:

i. 1,00,000 × 20/100×1/2 10,000

Bank- Purchase 50,000 31.12.09 Depreciation:

i. 2,00,000 × 20/100 40,000

ii. 1,00,000 × 20/100 20,000

iii. 50,000 × 20/100× ½ 5,000


3,90,000 3,90,000

01.01.10 2,05,000

Dr. Machinery Disposal Account Cr.

Date Particular ₹ Date Particular ₹

01.07.09 To Machinery 60,000 01.07.09 By Bank – Sale Proceeds 34,800

Profit & Loss A/c 25,200

60,000 60,000

Note:

1. Book value of Machinery as on July 1, 2009 will be as follows:

₹

Original Cost on July 1, 2007 (3,00,000 × 1/3) 1,00,000

Less Depreciation for 2007 (for 6 months) (1,00,000 × 20/100×1/2) 10,000

90,000

Less Depreciation for 2008 (1,00,000 × 20/100) 20,000

70,000

Less Depreciation for 2009 (for 6 months) (1,00,000 × 20/100×1/2) 10,000

60,000

2. If ‘Machinery Disposal Account’s is not kept, then Machinery account for the year 2009 will be

prepared as under:

Dr. Machinery Account (for 2009) Cr.


01.01.09 To Balance b/d 2,90,000 01.07.09 By Depreciation 10,000


Bank 50,000 Bank- Sale Proceeds 34,800

Profit & Loss A/c 25,200

Loss on Sale (60,000 – 34,800)

Depreciation 65,000


3,40,000 3,40,000

01.01.10 Balance b/d 2,05,000

[CMA INTER SY08, J13, 5 Marks]

Question 10: On December, 2011 two machines, which were purchased on 1st October, 2008 costing

₹50,000 and ₹20,000 respectively had to be discarded and replaced by two new machines costing ₹50,000

and ₹25,000 respectively.

One of the discarded machines was sold for ₹20,000 and other for ₹10,000. The balance of Machinery

Accounts as on April 1, 2011 was ₹3,00,000 against which the depreciation provision stood at ₹1,50,000.

Depreciation was provided @ 10% on Reducing Balance Method.

Prepare the Machinery A/c, Provision for Depreciation A/c and machinery Disposal A/c.

Answer:

Dr Machinery Account Cr

Date Particulars Amt. ( ₹) Date Particulars Amt. ( ₹)

1-4-2011 To Balance c/d 3,00,000 31-12-2011 By Machinery Disposal 70,000

31-12-11 Bank 75,000 31-03-2012 Balance c/d 3,25,000

3,75,000 3,75,000

1-4-2013 Balance b/d 3,25,000

Dr. Provision for Depreciation Account Cr.


31.12.11 To Machinery Disposal a/c 20,175 01.04.11 By Balance b/d 1,50,000

[16,135+4,040] 31.12.11 P & L A/c [WN 1] 11,489

31.03.12 Balance c/d 1,41,314 31.03.12

1,61,489 1,61,489

1-4-12 Balance b/d 1,41,314



Date Particulars ₹ Date Particulars ₹

31-12-11 To Machinery A/c 70,000 31-12-11 By Provision for Depreciation A/c 20,175

Bank 30,000

P & L A/c (Bal fig.) 19,825

70,000 70,000

Working Notes:

1. Depreciation on the machines till April 1, 2012 Machine 1 Machine 2 Total

01.10.08 Original Value 50,000 20,000 70,000

Depreciation [01.10.08-31.03.09] 2,500 1,000 3,500

31.03.09 Written Down Value 47,500 19,000 66,500

Depreciation [01.04.09-31.03.10] 4,750 1,900 6,650


Depreciation [01.04.10-31.03.11] 4,275 1,710 5,985


Depreciation [01.04.11-31.12.11]

31.12.11 Written Down Value

Total depreciation on assets sold 16,135

[3,500+6,650+5,985]

2 Depreciation on Discarded Machine

Book Value of Machine as on 01.04.2011 53,865

Less Depreciation @ 10% for 9 months [till 31.12.11] 4,040

Value of Discarded Machine as on selling date 49,825

3 Depreciation of machinery in use

Value of machinery on 1st April, 2011 3,00,000

Less Cost of discarded machines: 70,000

2,30,000

Less Provision for Depreciation on 1 April, 2011 1,50,000

Less: Depreciation on discarded machines: 16,135 1,33,865


96,135

Depreciation @ 10% on 96,135 9,614

Add Depreciation for 3 months on ₹75,000 1,875

11,489

[CMA RTP J12]

Question 11: On December, 2011 two machines, which were purchased on 1st October, 2008 costing

₹30,000 and ₹24,000 respectively had to be discarded and replaced by two new machines costing ₹40,000

and ₹30,000 respectively.

One of the discarded machines was sold for ₹16,000 and other for ₹6,000. The balance of Machinery

Accounts as on April 1, 2011 was ₹5,00,000 against which the depreciation provision stood at ₹2,10,000.

Depreciation was provided @ 10% on WDV method.

Prepare the Machinery A/c, Provision for Depreciation A/c and machinery Disposal A/c.

Answer:



1-4-2011 To Balance c/d 500000 31-12-2011 By Machinery Disposal 54000

31-12-11 Bank 70000 31-03-2012 Balance c/d 516000

570000 570000

1-4-2013 Balance b/d 516000

Dr. Provision for Depreciation Account Cr.


31.12.11 To Machinery Disposal a/c 15,564 01.04.11 By Balance b/d 2,10,000

31.12.11 P & L A/c [WN 1] 3,116

31.03.12 Balance c/d 224147 31.03.12 P & L A/c [WN 1] 26,595

2,39,711 2,39,711

1-4-12 Balance b/d 224147



Date Particulars ₹ Date Particulars ₹

31-12-11 To Machinery A/c 54,000 31-12-11 By Provision for Depreciation A/c 15,564

Bank 22,000

P & L A/c (Bal fig.) 16436

54,000 54000

Working Notes:

1. Depreciation on the two machines till April 1, 2012 ₹ ₹

01.10.08 Original Value 54,000

Depreciation [01.10.08-31.03.09] 2,700

31.03.09 Written Down Value 51,300

Depreciation [01.04.09-31.03.10] 5,130


Depreciation [01.04.10-31.03.11] 4,617


Depreciation [01.04.11-31.12.11] 3,116


Total depreciation on assets sold 15,564

2 Depreciation of machinery in use

Value of machinery on 1st April, 2011 5,00,000

Less Cost of discarded machines: 54,000

4,46,000

Less Provision for Depreciation on 1 April, 2011 2,10,000

Less: Depreciation on discarded machines: 12,447 1,97,553

2,48,447

Depreciation @ 10% on 2,48,447 24,845

Add Depreciation for 3 months on ₹70000 1,750

26,595


[CMA INTER SY08, J14, 6 Marks]

Question 12: On 1st April, 2010, M/s. N. R. Sons & Co. purchased four machines for ₹2,60,000 each. On

1st April, 2011, one machine was sold for ₹2,05,000. On 1st July, 2012, the second machine was destroyed

by fire and insurance claim received ₹1,75,000 on 15th July,2012. A new machine costing ₹ 4,50,000 was

purchased on 1st October, 2012. Books are closed on 31st March every year and depreciation has been

charged @15% per annum on diminishing balance method. You are required to prepare machinery

account for 4 years till 31st March, 2014. (Calculations to be shown in nearest rupee)

Answer:


Date Particular ₹ Date Particular ₹

01.04.10 To Bank A/c 10,40,000 31.03.11 By Depreciation A/c 1,56,000

31.03.11 Balance c/d 8,84,000

10,40,000 10,40,000

01.04.11 Balance b/d 8,84,000 01.04.11 Bank a/c (machinery sold) 2,05,000


31.03.12 P& L A/c (Loss on sale) 16,000


8,84,000 8,84,000

01.04.12 Balance b/d 5,63,550 01.07.12 Insurance claim 1,75,000

P&L A/c (Loss on destroy) 5,806

Depreciation A/c 7,044

01.10.12 Bank 4,50,000 31.03.13 Depreciation A/c 90,106

31.03.13 Balance c/d 7,35,595

10,13,550 10,13,550

01.04.13 Balance b/d 7,35,595 31.03.14 Depreciation 1,10,339

31.03.14 Balance c/d 6,25,256

7,35,595 7,35,595

01.04.14 Balance b/d 6,25,256

Workings

Particulars M-1 M- 2 M-3 M- 4 M- 5

01.04.2010 Purchased of Machinery 2,60,000 2,60,000 2,60,000 2,60,000 -


Less Depreciation@15% p. a 39,000 39,000 39,000 39,000 -

W.D.V. on 31.03.11 2,21,000 2,21,000 2,21,000 2,21,000 -

Less Sold of machinery on 01.04.11 2,05,000 - - - -

Loss on Sale 16,000 - - - -

Less Depreciation @ 15% P.a. - 33,150 33,150 33,150 -

W. D. V. on 31.03.12 1,87,850 1,87,850 1,87,850 -

Less Depreciation @ 15% for 3 months i.e. 01.04.12-

01.07.12

- 7,044 - - -

1,80,806 1,87,850 1,87,850

Less Amount recd from Insurance claim 1,75,000

Loss on fire 5,806

On 10.10.12 Purchased of machinery 4,50,000

Less Depreciation of 2 machines for full years 28,178 28,177

1,59,672 1,59,673

Less Depreciation for 6th months of new machinery - - 33,750

W.D.V. for 31.03.13 1,59,672 1,59,673 4,16,250

Less Depreciation for full year @ 15% p.a. 23,951 23,950 62,438

1,35,721 1,35,723 3,53,812

[CMA INTER J10, 5 Marks]

Question 13: From the following information prepare.

1. Fixed Assets Account and

2. Accumulated Depreciation Account :

Opening Balance ₹ Closing Balance ₹

Fixed Assets 4,00,000 5,50,000

Accumulated Depreciation 80,000 1,35,000

Additional Information: A part of a machine costing ₹60,000 has been sold for ₹30,000 on which

accumulated depreciation was ₹15,000.


Answer:

Dr Fixed Assets A/c Cr

To Balance b/d 4,00,000 By Accu. Depreciation 15,000

Bank A/c 2,10,000 Bank A/c 30,000

Loss on sale of Asset 15,000


6,10,000 6,10,000

Dr Accumulated Depreciation A/c Cr

To Fixed Assets A/c 15,000 By Balance b/d 80,000

Balance c/c 1,35,000 Profit and Loss A/c 70,000

1,50,000 1,50,000

CHANGE IN METHODS OF DEPRECIATION AND ESTIMATION

Question 14: Change In Estimated Useful Life: Plant has useful life of 10 years. Depreciable amount is

₹40 lakhs. The company has charged SLM depreciation. At the end of 6th year, the balance useful life was

re-estimated at 8 years. What is the depreciation will be charged from 7th year?

Answer: =

= 2

Question 15: A plant was depreciated under two different methods as under:-

SLM WDVM

I year 3.90 10.69

II year 3.90 7.90

III year 3.90 5.84

IV year 3.90 4.32

15.60 28.75

V year 3.90 3.19

Required:

1. If the company followed WDV for first four years and decides to switch over to SLM, what would be

the amount of resultant surplus/deficiency?


2. It the company followed SLM for first four years and decides to switch over to WDV, what would be

amount of resultant surplus/deficiency?

Answer: The change should be treated as a change in accounting policy and its effects should be

quantified and disclosed. The effect

1. Surplus of ₹13.15 will be written back to profit and loss account.

2. Deficiency of ₹13.15 should be charged to profit and loss account.

[CMA FOUNDATION J02, 16 Marks]

Question 16: Depreciation has been charged for the years 1998 to 2001 at 10% on reducing balance

method on opening balance of each item of plant and machinery in use. The balance of Plant and

Machinery Account on 31st December, 2001 was ₹54,000. There were no sales during these years and

purchases were ₹16,800 on September, 1998 and ₹11,400 in December 2000.

The management decided that depreciation should be charged at 20% on the same method but calculate

on the closing balance of each year with retrospective effect from 1998.

You are required to pass journal entry for giving effect to the revised basis at the end of 2001, and prepare

Plant and Machinery Account and Revised Plant and Machinery Account for all the years.

Answer: The Balance of Plant & Machinery accounts as on January 1998 is not given. This balance is to be

ascertained by working reversed way from 2001, by following original rate of depreciation i.e. 10% WDV.

Plant & Machinery Account

Particulars Amount Particulars Amount

01.01.98 To Balance b/d 48,000 31.12.98 By Depreciation 4,800

Sept Bank 16,800 (

₹60,000 – ₹16,800)

31.12.98 Balance c/d 60,000

64,800 64,800


(1/9 of 54,000)

31.12.99 Balance c/d 54,000

60,000 60,000


Dec Bank A/c 11,400

31.12.00 Balance c/d 60,000

65,400 65,400


01.01.01 Balance b/d 60,000 31.12.01 Depreciation (

₹54,000) 6,000

31.12.01 Balance c/d 54,000

60,000 60,000

When depreciation is calculated on the revised basis, the Plant & Machinery Account will be as under:

Revised Plant & Machinery

Particulars Amount Particulars Amount

01.01.98 To Balance b/d 48,000 31.12.98 By Depreciation 12,960

Sept Bank 16,800 (20% on 64,800)

Balance c/d 51,840

64,800 64,800


(20% on 51,840)

Balance c/d 41,472

51,840 51,840


Dec Bank A/c 11,400 (20% on 52,872)

Balance c/d 42,298

52,872 52,872


(20% on ₹42,298)

Balance c/d 33,838

42,298 42,298

The resultant impact on Profit and Loss A/c of ₹20,162 to be disclosed in notes to accounts

Depreciation

@ 10%

Residual

Value

Depreciation

@ 20%

Residual

Value

31.12.01 6,000 54,000 8,460 33,838

31.12.00 5,400 60,000 10,574 42,298

31.12.00 --- 65,400 -- --


31.12.99 6,000 54,000 10,368 41,472

31.12.98 4,800 60,000 12,960 51,840

31.12.98 -- 64,800 -- --

01.01.98 -- 48,000 -- --

22,200 42,362

Difference (42,362 – 22,200) ₹20,162

Journal Entry

31.12.01 Depreciation A/c Dr 2,460

Prior Period Adjustment A/c (Depreciation for Previous years) Dr 17,702

To Plant & Machinery A/c 20,162

[Being arrear provision of Depreciation chargeable at the revised rate of 20% and charged @ 10% for the

year 1998 to 2000 (₹33, 902 – ₹16,200) and for the year 2001 (₹8,460 - ₹6,000) charged]

g1 4 accounting for depreciation [d01-j14]

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