NCERT Solutions for Class 11 Accountancy: Financial Accounting Part - I chapter 12 Depreciation, Provisions and Reserves

Q:

Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.

A:

Straight Line method:

This method is based on the assumption of equal usage of the asset over its entire useful life. It is also called fixed installment method because the amount of depreciation remains constant from year to year over the useful life of the asset. According to this method, a fixed and an equal amount is charged as depreciation in every accounting period during the life time of an asset. The amount annually charged as depreciation is such that it reduces the original cost of the asset to its scarp value at the end of its useful life.

\begin{array}{l} Depreciation: \\ = \frac{Cost of asset - Estimated net residual value}{Estimated useful life of the asset} \end{array}

$\begin{array}{l} Rate of Depreciation: \\ = \frac{Annual depreciation amount}{Acquisition cost} x 100 \end{array}$

Written Down Value Method:

Under this method, depreciation is charged on the book value of the asset. Since book value keeps on reducing by the annual charge of depreciation. It is also known as reducing balance method.

This method involves the application of a pre-determined proportion/percentage of the book value of the asset at the beginning of every accounting period. The amount of depreciation reduces year after year.

$\begin{array}{l} Depreciation: \\ R = [1 - n \sqrt{\frac{s}{c}}] x 100 \\ Where, \\ R = Rate of depreciation \\ n = Expected useful life \\ s = Scrap value \\ c = Cost of an asset \end{array}$

Basis of Difference	Straight Line Method	Written Down Value method
Basis of charging depreciation	Original cost	Book value (original cost less depreciation charged till date)
Annual depreciation charge	Fixed (Constant) year	Declines year after year
Total charge against profit and loss account in respect of depreciation and repairs	Unequal year after year. It increases in later years.	Almost equal every year.
Recognition by income tax law	Not recognised	Recognised
Suitability	It is suitable for assets in which repair charges are less, the possibility of and obsolescence is low scrap value depends upon the time period involved.	It is suitable for assets, which are affected by technological changes and require more repair expenses with passage of time.

Q:

Explain the concept of ‘secret reserve’.

A:

Specific reserve is the reserve, which is created for some specific purpose and can be utilised only for that purpose.

It is a reserve which does not appear in the balance sheet. It may also help to reduce the disclosed profits and also the tax liability. The secret reserve can be merged with the profits during the lean periods to show improved profits.

Q:

Distinguish between ‘general reserve’ and ‘specific reserve’.

A:

When the purpose for which reserve is created is not specified called general reserve or free reserve, while Specific reserve is the reserve which is created for some specific purpose and can be utilised only for that purpose.

Q:

Explain basic factors affecting the amount of depreciation.

A:

The basic factors affecting the amount of depreciation are:

Cost of asset.
Estimated net residual value.
Depreciable cost.
Estimated useful life.

Q:

What are the causes of depreciation?

A:

The various causes of depreciation are:

Wear and Tear due to use or passage of time.
Expiration of legal rights.
Obsolescence.
Abnormal factors.

Q:

State briefly the need for providing depreciation.

A:

Need for Depreciation:

Matching of costs and revenue.
Consideration of tax.
True and fair financial position.
Compliance with law.

Q:

What is depreciation?

A:

Depreciation is decline in the value of a tangible fixed asset. In accounting, depreciation is the process of allocating depreciable cost over useful life of a fixed asset.

Q:

Give four examples each of ‘revenue reserve’ and ‘capital reserve’.

A:

Examples of Revenue Reserve:

General reserve.
Workmen compensation fund.
Investment fluctuation fund.
Dividend equalisation reserve.
Debenture redemption reserve.

Examples of Capital Reserve:

Premium on issue of share or debenture.
Profit on sale of fixed assets.
Profit on redemption of debentures.
Profit on revaluation of fixed asset and liabilities.
Profits prior to incorporation.

Q:

What are the effects of depreciation on profit and loss account and balance sheet?

A:

Depreciation is charged on fixed assets and is an expense for the business. It is shown on the debit side of the profit and loss account as an expense.

In the Balance Sheet, it is shown by way of deduction from the concerned asset. Hence the book value of the asset is reduced.

Q:

“In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year”, which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.

A:

Written down value method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account of depreciation and repair, because this method results in almost equal burden of depreciation and repair expenses taken together every year on profit and loss account. While on straight line method, the total amount charged against profit on account of depreciation and repair taken together will not be uniform throughout the life of the asset, rather it will keep on increasing from year to year.

Q:

Explain determinants of the amount of depreciation.

A:

The determination of depreciation depends on three parameters, viz. cost, estimated useful life and probable salvage value.

Cost of Asset:

Cost (original or historical asset) of an asset includes invoice price and other costs, which are necessary to put the asset in use or working condition. Besides the purchase price, it includes freight and transportation cost, transit insurance, installation cost, registration cost, commission paid on purchase of asset add items such as software, etc.

Estimated Net Residual Value:

Net Residual value (also known as scrap value or salvage value for accounting purpose) is the estimated net realizable value (sale value) of the asset at the end of its useful life. The net residual value is calculated after deducting the expenses necessary for the disposal of the asset.

Depreciable cost of an asset is equal to its cost less net residual value.

Estimated useful life of Asset: Useful life of an asset is estimated in terms of number of years, it can be effectively used for business operations. For example, if a machine can work for 25 years but is likely to become obsolete in 15 years on account of availability of a better type of machine due to improved technology, its useful life will be considered as only 15 years.

Useful life depends up on the following factors:

Pre-determined by legal or contractual limits, e.g. in case of leasehold asset, the useful life is the period of lease.
The number of shifts for which asset is to be used.
Repair and maintenance policy of the business organisation.
Technological obsolescence.
Innovation/improvement in production method.
Legal or other restrictions.

Q:

Distinguish between ‘revenue reserve’ and ‘capital reserve’.

A:

Basis	Revenue Reserve	Capital Reserve
Source of creation	It is created out of revenue profits which arise out of normal operating activities of the business and are otherwise available for dividend distribution.	It is created primarily out of capital profit which do not arise out of the normal operating activities of the business and not available for dividend distribution.
Purpose	It is created to strengthen the financial position to meet unforeseen contingencies or for some specific purposes.	It is created for compliance of legal, requirements or accounting practices.
Usage	A specific revenue reserve can be utilsed only for the earmarked purpose while a general reserve can be utilised for any purpose including distribution of dividend.	It can be utilised for specific purposes as provided in the law in force e.g. to write off capital losses or issue of bonus shares.

Q:

Distinguish between ‘provision’ and ‘reserve’.

A:

Basis	Provision	Reserve
Basic Nature	Charge against profit	Appropriation of profit
Purpose	It is created for a known liability or expense pertaining to current accounting period, the amount of which is not certain.	It is made for strengthening the financial position of the business.
Effect on taxable profits	It reduces taxable profits.	It has no effect on taxable profit.
Presentation in Balance Sheet	It is shown either (i) by way of deduction from the item on the asset side for which it is created or (ii) in the liabilities side along with current liabilities.	It is shown on the liabilities side after capital amount.
Use for the payment of dividend	It can not be used for dividend distribution.	It can be used for dividend distribution.

Q:

On July 01, 2010, Ashok Ltd. purchased a machine for ₹1,08,000 and spent ₹12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be ₹12,000. Prepare machine account and depreciation account in the books of Ashok Ltd. for first three years, if depreciation is written off according to straight line method. The accounts are closed on December 31 every year.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2010			2010
Jul 1	To Bank	1,20,000	Dec 31	By Depreciation	4,500
			Dec 31	By Balance c/d	1,15,500
		1,20,000			1,20,000
2011			2011
Jan 1	To Balance b/d	1,15,500	Dec 31	By Depreciation	9,000
			Dec 31	By Balance c/d	1,06,500
		1,15,500			1,15,500
2012			2012
Jan 1	To Balance b/d	1,06,500	Dec 31	By Depreciation	9,000
			Dec 31	By Balance c/d	97,500
		1,06,500			1,06,500
2013
Jan 1	To Balance b/d	97,500

Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2010			2010
Dec 31	To Machinery	4,500	Dec 31	By Profit & Loss	4,500
		4,500			4,500
2011			2011
Dec 31	To Machinery	9,000	Dec 31	By Profit & Loss	9,000
		9,000			9,000
2012			2012
Dec 31	To Machinery	9,000	Dec 31	By Profit & Loss	9,000
		9,000			9,000

Amount to be written off = ₹1,08,000 + ₹12,000 - ₹12,000 = ₹1,08,000.

Annual amount of depreciation is equal to ₹1,08,000 divided by 12 which amounts to ₹9,000

For the first year, machine has been used for half year that's why depreciation has been charged only ₹4,500

Q:

A Noida based Construction Company owns 5 cranes and the value of this asset in its books on April 01, 2017 is ₹40,00,000. On October 01, 2017 it sold one of its cranes whose value was ₹5,00,000 on April 01, 2017 at a 10% profit. On the same day it purchased 2 cranes for ₹4,50,000 each. Prepare cranes account. It closes the books on December 31 and provides for depreciation on 10% written down value.

A:

Cranes Account
Date	Particulars	₹	Date	Particulars	₹
2017			2017
Apr 1	To Balance b/d ₹(35,00,000 + 5,00,000)	40,00,000	Oct 1	By Depreciation A/c @ 10% on ₹5,00,000 for six months)	25,000
Oct 1	To Profit & Loss (Profit)	47,500
Oct 1	To Bank A/c ₹(4,50,000 x 2)	9,00,000	Oct 1	By Bank A/c ₹4,75,000 x 110/100	5,22,500
			Dec 31	By Depreciation A/c @10% on ₹35,00,000 for 9 months)	2,62,500
				@10% on ₹9,00,000 for 3 months	22,500
			Dec 31	By Balance c/d	41,15,000
		49,47,500			49,47,500

Q:

On October 01, 2010, a truck was purchased for ₹8,00,000 by Laxmi Transport Ltd. Depreciation was provided at 15% p.a. on the diminishing balance basis on this truck. On December 31, 2013 this truck was sold for ₹5,00,000. Accounts are closed on 31^st March every year. Prepare a Truck Account for four years.

A:

Truck Account
Date	Particulars	₹	Date	Particulars	₹
2010			2011
Oct 1	To Bank	8,00,000	Mar 31	By Depreciation (15% for 6 months)	60,000
			Mar 31	By Balance c/d	7,40,000
		8,00,000			8,00,000
2011			2012
Apr 1	To Balance b/d	7,40,000	Mar 31	By Depreciation (15% on ₹7,40,000)	1,11,000
			Mar 31	By Balance c/d	6,29,000
		7,40,000			7,40,000
2012			2012
Apr 1	To Balance b/d	6,29,000	Mar 31	By Depreciation (15% on ₹6,29,000)	94,350
			Mar 31	By Balance c/d	5,34,650
		6,29,000			6,29,000
2013			2013
Apr 1	To Balance b/d	5,34,650	Dec 31	By Depreciation (15% on ₹5,34,650 for 9 months)	60,148
Dec 31	To Profit & Loss (Profit)	25,498	Dec 31	By Bank (Sales Proceed)	5,00,000
		5,60,148			5,60,148

Q:

What are ‘provisions’? How are they created? Give accounting treatments in case of provision for doubtful debts.

A:

According to the Companies Act, Provision refers to the amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or the amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.

Examples of provisions:

Provision for depreciation of assets.
Provision for taxation.
Provision for bad and doubtful debts.
Provision for discount on debtors.
Provision for repairs and renewals of assets.

Accounting treatment for provisions:

When business transaction takes place on credit basis, debtors account is created and its balance is shown on the asset-side of the balance sheet.

For creating a provision for doubtful debts the journal entry is:

Dt.	Particulars		L.F.	Dr. ₹	Cr. ₹
	Profit & Loss A/c	Dr.
	To Provision for doubtful debts

Q:

Name and explain different types of reserves in details.

A:

A reserve is created by retention of profit of the business can be for either a general or a specific purpose.

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 utilize it for any purpose. General Reserve strengthens the financial position of the business.

Specific Reserve: Specific reserve is the reserve, which is created for some specific purpose and can be utiised only for that purpose. Examples of specific reserves are:

Dividend equalisation reserve: This reserve is created to stabilize or maintain dividend rate. In the year of high profit, amount is transferred to Dividend Equalisation reserve and in year of low profit, this amount is used to maintain the rate of dividend.

Workmen Compensation Fund: It is created to provide for claims of the workers due to accident, etc.

Investment fluctuation fund: It is created to make for decline in the value of investment due to market fluctuations.

Debenture Redemption reserve: It is created to provide funds for redemption of debentures.

Reserves are also classified as revenue and capital reserves according to the nature of the profit out of which they are created.

Revenue Reserves: These 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;
Workman Compensation fund;
Investment fluctuation fund;
Dividend equalisation reserve.
Debenture redemption reserve.

Capital Reserves: These are created out of capital profits which do not arise from the normal operating activities. These reserves can be used for writing off capital losses or issue of bonus shares in case of a company.

Examples are:

Premium on issue of shares or debentures.
Profit on sale of fixed assets.
Profit on redemption of debentures.
Profit on revaluation of fixed asset and liabilities.
Profits prior to incorporation.
Profits on reissue of forfeited shares.

Q:

Explain the concept of depreciation, what is the need for charging depreciation and what are the causes of depreciation?

A:

Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on it’s market value.

Causes of Depreciation:

Wear and Tear due to use or passage of time: Wear and tear means deterioration and the consequent diminution in an assets value, arising from its use in business operations for earning revenue. An asset deteriorates simply with the passage of time, even though they are not being put to any use.
Expiration of legal rights: Certain categories of assets loose their value after the agreement governing their use in business comes to an end after the expiry of pre-determined period. Examples of such assets are patents, copyrights, leases etc.
Obsolescence: It is another factor leading to depreciation of fixed assets. Obsolescence means the fact of being ‘out-of-date. It implies to an existing asset becoming out-of-date on account of the availability of better type of asset. It arises from such factors as technological changes, improvement in production methods, change in market demand for the product or service output of the asset.
Abnormal factors: Decline in the usefulness of the asset may be caused by abnormal factors such as accidents due to fire, earthquake, floods, etc.

Need for Depreciation:

Matching of costs and revenue: The rationale of the acquisition of fixed assets in business operations is that these are used in the earning of revenue. Every asset is bound to undergo some wear and tear and hence lose value, once it is put to use in business.
Consideration of Tax: Depreciation is a deductible cost for tax purposes. However tax rules for the calculation of depreciation amount need not necessary be similar to current business practices.
True and fair financial position: If depreciation on assets is not provided for, then the assets will be overvalued and the balance sheet will not depict the correct financial position of the business.
Compliance with Law: Apart from tax regulations, there are certain specific legislations that indirectly compel some business organisations like corporate enterprises to provide depreciation on fixed assets.

Q:

Give four examples each of ‘provision’ and ‘reserves’.

A:

Examples of provision:

Provision for depreciation.
Provision for bad and doubtful debts.
Provision for taxation.
Provision for discount on debtors.
Provision for repairs and renewals.

Examples of Reserve:

General reserve.
Workmen compensation fund.
Investment fluctuation fund.
Capital reserve.
Dividend equalisation reserve.

Q:

Distinguish between straight line method and written down value method of calculating depreciation.

A:

Basis	Straight Line Method	Written Down Value Method
Charging depreciation	Original cost	Book value (i.e., original cost less depreciation charged till dated)
Annual depreciation charge	Fixed (Constant)year	Declines year after year
Total charged against profit and loss account in respect of depreciation and repairs	Unequal year after year. It increases in later years.	Almost equal every year.
Recognition by Income	Not recognised	Recognised
Suitability	It is suitable for assets in which repair charges are less, the possibility of and obsolescence is low scrap value depends upon the period involved.	It is suitable for assets, which are affected by technological changes and require more repair expenses with passage of time.

Q:

On October 01, 2011 Juneja Transport Company purchased 2 trucks for ₹10,00,000 each. On July 01, 2013, on truck was involved in an accident and was completely destroyed and ₹6,00,000 were received from the insurance company in full settlement. On December 31, 2013 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for ₹1,50,000. On January 31, 2014 company purchased a fresh truck for ₹12,00,000. Depreciation is to be provided at 10% p.a. on the written down value every year. The books are closed every year on March 31. Give the truck account from 2011 to 2014.

A:

Truck Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Oct 1	To Bank	20,00,000	Mar 31	By Depreciation (@ 10% for 6 months)	1,00,000
			Mar 31	By Balance c/d	19,00,000
		20,00,000			20,00,000
2012			2013
Apr 1	To Balance b/d	19,00,000	Mar 31	By Depreciation (@ 10% for a year)	1,90,000
			Mar 31	By Balance c/d	17,10,000
		19,00,000			19,00,000
2013			2013
Apr 1	To Balance b/d	17,10,000	Jul 1	By Depreciation (for 3 months @ 10% on ₹8,50,000)	21,375
			Jul 1	By Bank (Insurance Company)	6,00,000
			Jul 1	By Profit & Loss (Loss)	2,33,625
			Dec 31	By Depreciation (for 9 months @ 10% on ₹8,55,000)	64,125
			Dec 31	By Bank	1,50,000
			Dec 31	By Profit & Loss (Loss)	6,40,875
2014			2014
Jan 31	To Bank (Purchase of New Truck)	12,00,000	Mar 31	By Depreciation (10% for 2 months on 12,00,000)	20,000
			Mar 31	By Balance c/d	11,80,000
		29,10,000			29,10,000

Working Note:

Loss on Sale on 1^st Truck
	₹
Value of truck on 1st, April 2013: ₹17,10,000 / 2	8,55,000
Less: Depreciation for 3 months @ 10% on ₹8,55,000	(21,375)
Value at the time of disposal	8,33,625
Less: Insurance claim received	(6,00,000)
Loss on settlement of 1^st truck	2,33,625

Loss on Sale on 2^nd Truck
	₹
Value of truck on 1st, April 2013: ₹17,10,000 / 2	8,55,000
Less: Depreciation for 9 months @ 10% on ₹8,55,000	(64,125)
Value at the time of disposal	7,90,875
Less: value received from insurance company	(1,50,000)
Loss on settlement of 1^st truck	6,40,875

Computation of Depreciation on 3^rd Truck:

It was purchased on Jan 31, 2014, Hence Depreciation will be charged for 2 months only i.e., Feb and Mar on ₹12,00,000 at the rate of 10% p.a., which amounts to ₹20,000.

Q:

On January 01, 2011, Satkar Transport Ltd. purchased 3 buses for ₹10,00,000 each. On July 01, 2013 one bus was involved in an accident and was completely destroyed and ₹7,00,000 were received from the Insurance Company in full settlement. Depreciation is written off @15% p.a. on diminishing balance method. Prepare bus account from 2011 to 2014. Books are closed on December 31, every year.

A:

Bus Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Jan 1	To Bank	30,00,000	Dec 31	By Depreciation (@ 15%)	4,50,000
			Dec 31	By Balance c/d	25,50,000
		30,00,000			30,00,000
2012			2012
Jan 1	To Balance b/d	25,50,000	Dec 31	By Depreciation (@ 15% on ₹25,50,000)	3,82,500
			Dec 31	By Balance c/d	21,67,500
		25,50,000			25,50,000
2013			2013
Jan 1	To Balance b/d	21,67,500	Jul 1	By Depreciation (6 months)	54,188
Jul 1	To Profit & Loss (Profit)	31,688	Jul 1	By Bank (Insurance Claim)	7,00,000
			Dec 31	By Depreciation	2,16,750
			Dec 31	By Balance c/d	12,28,250
		21,99,188			21,99,188
2014			2014
Jan 1	To Balance b/d	12,28,250	Dec 31	By Depreciation (@ 15%)	1,84,237
			Dec 31	By Balance c/d	10,44,013
		12,28,250			12,28,250

Book value of accidental bus on 01 Jan 2013 = ₹7,22,500

Depreciation on accidental bus from 01 Jan 2013 to the date of sale = ₹54,188

Value of bus on the date of sale = ₹7,22,500 - ₹54,188 = ₹6,68,312

Profit on accidental bus = ₹7,00,000 - ₹6,68,312 = ₹31,688

Q:

On July 01, 2011 Ashwani purchased a machine for ₹2,00,000 on credit. Installation expenses ₹25,000 are paid by cheque. The estimated life is 5 years and its scarp value after 5 years will be ₹20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2011 and prepare necessary ledger accounts for first three years.

A:

Journal Entries
Date	Particulars			L.F	Dr. (₹)	Cr. (₹)
2011
Jul 1	Machinery A/c		Dr.		2,25,000
	To Sundry Creditor’s A/c					2,00,000
	To Bank A/c					25,000
	(Being machinery purchased for ₹2,00,000 and installation charges of ₹25,000 paid through cheque)
Dec 31	Depreciation A/c		Dr.		20,500
	To Machinery A/c					20,500
	(Bing depreciation charged on machinery for six months)
Dec 31	Profit & Loss A/c		Dr.		20,500
	To Depreciation A/c					20,500
	(Being depreciation charged on machinery transferred to Profit & Loss Account)
2012					41,000
Dec 31	Depreciation A/c		Dr.			41,000
	To Machinery A/c
	(Being depreciation charged on machinery)
Dec 31	Profit & Loss A/c		Dr.		41,000
	To Depreciation A/c					41,000
	(Being depreciation charged on machinery transferred to Profit & Loss Account)
2013
Dec 31	Depreciation A/c		Dr.		41,000
	To Machinery A/c					41,000
	(Being depreciation charged on machinery)
Dec 31	Profit & Loss A/c	Dr.			41,000
	To Depreciation A/c					41,000
	(Being depreciation charged on machinery transferred to Profit & Loss Account)

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Jul 1	To Sundry Creditor’s A/c	2,00,000	Dec 31	By Depreciation	20,500
Jul 1	To Bank A/c	25,000	Dec 31	By Balance c/d	2,04,500
		2,25,000			2,25,000
2012			2012
Jan 1	To Balance b/d	204,500	Dec 31	By Depreciation	41,000
			Dec 31	By Balance c/d	1,63,500
		2,04,500			2,04,500
2013			2013
Jan 1	To Balance b/d	1,63,500	Dec 31	By Depreciation	41,000
			Dec 31	By Balance c/d	1,22,500
		1,63,500			1,63,500

Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Dec 31	To Machinery	20,500	Dec 31	By Profit & Loss	20,500
		20,500			20,500
2012			2012
Dec 31	To Machinery	41,000	Dec 31	By Profit & Loss	41,000
		41,000			41,000
2013			2013
Dec 31	To Machinery	41,000	Dec 31	By Profit & Loss	41,000
		41,000			41,000

Working Note:

\begin{array}{l} Computation of Depreciation to be charged Annually: \\ Dep = \frac{Cost of Machine - Scrap}{No of years (effective Life)} \\ = \frac{₹2,25,000 - ₹20,000}{5} \\ =  ₹41,000 \end{array}

Q:

Berlia Ltd. purchased a second hand machine for ₹56,000 on July 01, 2015 and spent ₹24,000 on its repair and installation and ₹5,000 for its cartage. On September 01, 2016, it purchased another machine for ₹2,50,000 and spent ₹10,000 on its installation. (a) Depreciation is provided on machinery @10% p.a. on original cost method annually on December 31. Prepare machinery account and depreciation account from the year 2015 to 2018. (b) Prepare machinery account and depreciation account from the year 2015 to 2018. If depreciation is provided on machinery @10% p.a. on written down value method annually on December 31.

A:

(a)

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Jul 1	To Bank Machine 1: ₹(56,000 + 24,000 + 5,000)	85,000	Dec 31	By Depreciation	4,250
			Dec 31	By Balance c/d	80,750
		85,000			85,000
2016			2016
Jan 1	To Balance b/d Machine 1	80,750	Dec 31	By Depreciation:
				M 1 : 8,500 M 2: 8,667	17,167
Sep 1	To Bank M 2: ₹(2,50,000 + 10,000)	2,60,000	2016
			Dec 31	By Balance c/d
				M 1: 72,750 M 2:2,51,333	3,23,583
		3,40,750			3,40,750
2017			2017
Jan 1	To Balance b/d		Dec 31	By Depreciation
	M 1: 72,250 M 2: 2,51,333	3,23,583		M 1: 8,500 M 2: 26,000	34,500
			Dec 31	By Balance c/d
				M 1: 63,750 M 2:2,25,333	2,89,083
		3,23,583			3,23,583
2018			2018
Jan 1	To Balance b/d		Dec 31	By Depreciation
	M 1: 63,750 M 2: 2,25,333	2,89,083		M 1: 8,500 M 2: 26,000	34,500
				By Balance c/d
				M 1: 55,250 M 2:1,99,333	2,54,583
		2,89,083			2,89,083

Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Dec 31	To Machinery	4,250	Dec 31	By Profit & Loss	4,250
		4,250			4,250
2016			2016
Dec 31	To Machinery: M1: 8,500 M2: 8,667	17,167	Dec 31	By Profit & Loss	17,167
		17,167			17,167
2017			2017
Dec 31	To Machinery: M1: 8,500 M2: 26,000	34,500	Dec 31	By Profit & Loss	34,500
		34,500			34,500
2018			2018
Dec 31	To Machinery: M1: 8,500 M2: 8,667	34,500	Dec 31	By Profit & Loss	34,500
		34,500			34,500

\begin{array}{l} Working Note: \\ Computation on Depreciation: \\ M 1 = (₹56,000+₹24,000+₹5,000) @ 10% =  ₹8,500 \\ M 2 = (₹2,50,000+₹10,000) @ 10% = ₹26,000 \\ Depreciation for 2015 on M 1 will be charged for half \\ year as it was purchased on 1st July, \\ i .e ., \frac{₹8,500}{2} =  ₹4,250 . \\ Depreciation on M 2 will be charged in 2016 for 4 months \\ only as it was purchased on 1st September: \\ = [₹26,000 x \frac{4}{12}] = ₹8,667 \end{array}

(b)

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Jul 1	To Bank Machine 1: ₹(56,000 + 24,000 + 5,000)	85,000	Dec 31	By Depreciation	4,250
			Dec 31	By Balance c/d	80,750
		85,000			85,000
2016			2016
Jan 1	To Balance b/d M 1: 80,750	80,750	Dec 31	By Depreciation:
				M 1: 8,075 M 2: 8,667	16,742
Sep 1	To Bank M 2: ₹(2,50,000 + 10,000)	2,60,000	2016
			Dec 31	By Balance c/d
				M 1: 72,675 M 2:2,51,333	3,24,008
		3,40,750			3,40,750
2017			2017
Jan 1	To Balance b/d		Dec 31	By Depreciation
	M1: 72,675 M 2: 2,51,333	3,24,008		M 1: 7,268 M 2: 25,133	32,401
			Dec 31	By Balance c/d
				M 1 : 65,407 M 2 :2,26,200	2,91,607
		3,24,008			3,24,008
2018			2018
Jan 1	To Balance b/d		Dec 31	By Depreciation
	M 1: 65,407 M 2: 2,26,200	2,91,607		M 1: 6,540 M 2: 22,620	29,160
				By Balance c/d
				M 1 : 58,867 M 2 :2,03,580	2,62,447
		2,91,607			2,91,607

Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Dec 31	To Machinery	4,250	Dec 31	By Profit & Loss	4,250
		4,250			4,250
2016			2016
Dec 31	To Machinery: M1: 8,075 M2: 8,667	16,742	Dec 31	By Profit & Loss	16,742
		16,742			16,742
2017			2017
Dec 31	To Machinery: M1: 7,268 M2: 25,133	32,401	Dec 31	By Profit & Loss	32,401
		32,401			32,401
2018			2018
Dec 31	To Machinery: M1: 6,540 M2: 22,620	29,160	Dec 31	By Profit & Loss	29,160
		29,160			29,160

Note: As per the solution, the balance of machine account, as on 01/01/2019 is ₹2,62,447; whereas, as per the textbook, the balance is ₹2,62,448.

Q:

Reliance Ltd. purchased a second hand machine for ₹ 56,000 on October 01, 2011 and spent ₹ 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for ₹ 6,000 at the end of its useful life of 15 years. More over an estimated cost of ₹ 1,000 is expected to be incurred to recover the salvage value of ₹ 6,000. Prepare machine account and Provision for depreciation account for the first three years charging depreciation by fixed installment method. Accounts are closed on March 31, every year.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2011			2012
Oct 1	To Bank `(56,000 + 28,000)	84,000	Mar 31	By Balance c/d	84,000
		84,000			84,000
2012			2013
Apr 1	To Balance b/d	84,000	Mar 31	By Balance b/d	84,000
		84,000			84,000
2013			2014
Apr 1	To Balance b/d	84,000	Mar 31	By Balance b/d	84,000
		84,000			84,000

Provision for Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2012			2012
Mar 31	To Balance c/d	1,316	Mar 31	By Depreciation	1,316
		1,316			1,316
2014			2013
Mar 31	To Balance c/d	6,583	Apr 1	By Balance b/d	1,316
			Mar 31	By Depreciation	5,267
		6,583			6,583
2015			2014
Apr 1	To Balance c/d	11,850	Apr 1	By Balance b/d	6,583
			Mar 31	By Depreciation	5,267
		11,850			11,850
			2015
			Apr 1	By Balance b/d	11,850

$\begin{array}{l} Working Note: \\ Computation of Depreciation: \\ Cost of Machine 56,000 \\ + 28,000 \\ - 6,000 (scrap) \\ = 78,000 \\ + 1,000 (Recover expenses) \\ = 79,000 \\ Depreciation = \frac{79, 000}{15} = ₹ 5,267 \end{array}$

Q:

On April 01, 2010, Bajrang Marbles purchased a Machine for ₹ 1,80,000 and spent ₹ 10,000 on its carriage and ₹ 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be ₹ 20,000. Prepare machine account and Depreciation account for the first four years by providing depreciation on straight line method. Accounts are closed on March 31^st every year. Prepare Machine account. Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2010			2011
1 Apr	To Bank A/c ₹(1,80,000+10,000+10,000)	2,00,000	Mar 31	By Depreciation	20,000
			Mar 31	By Balance c/d	1,80,000
		2,00,000			3,00,000
2011			2012
Apr 1	To Balance b/d	1,80,000	Mar 31	By Depreciation	20,000
			Mar 31	By Balance c/d	1,60,000
		1,80,000			1,80,000
2012			2013
Apr 1	To Balance b/d	1,60,000	Mar 31	By Depreciation	20,000
			Mar 31	By Balance c/d	1,40,000
		1,60,000			1,60,000
2013			2014
Apr 1	To Balance b/d	1,40,000	Mar 31	By Depreciation	20,000
			Mar 31	By Balance c/d	1,20,000
		1,40,000			1,40,000

Working notes:
Annual depreciation = 2,00,000/10 = Rs. 20,000.
Cost = 1,80,000 + 10,000 + 10,000 = Rs. 2,00,000

Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Mar 31	To Machinery	20,000	Mar 31	By Profit & Loss	20,000
		20,000			20,000
2012			2012
Mar 31	To Machinery	20,000	Mar 31	By Profit & Loss	20,000
		20,000			20,000
2013			2013
Mar 31	To Machinery	20,000	Mar 31	By Profit & Loss	20,000
		20,000			20,000
2014			2014
Mar 31	To Machinery	20,000	Mar 31	By Profit & Loss	20,000
		20,000			20,000

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2010			2011
Apr 1	To Bank	2,00,000	Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000
2011			2012
Apr 1	To Balance b/d	2,00,000	Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000
2012			2013
Apr 1	To Balance b/d	2,00,000	Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000
2013			2014
Apr 1	To Balance b/d	2,00,000	Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000

Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Mar 31	To Provision for Depreciation	20,000	Mar 31	By Profit and Loss	20,000
		20,000			20,000
2012			2012
Mar 31	To Provision for Depreciation	20,000	Mar 31	By Profit and Loss	20,000
		20,000			20,000
2013			2013
Mar 31	To Provision for Depreciation	20,000	Mar 31	By Profit and Loss	20,000
		20,000			20,000
2014			2014
Mar 31	To Provision for Depreciation	20,000	Mar 31	By Profit and Loss	20,000
		20,000			20,000

Provision for Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Mar 31	To Balance c/d	20,000	Mar 31	By Depreciation	20,000
		20,000			20,000
2012			2011
Mar 31	To Balance c/d	40,000	Apr 1	By Balance b/d	20,000
			2012
			Mar 31	By Depreciation	20,000
		40,000			40,000
2013			2012
Mar 31	To Balance c/d	60,000	Apr 1	By Balance b/d	40,000
			2013
			Mar 31	By Depreciation	20,000
		60,000			60,000
2014			2013
Mar 31	To Balance c/d	80,000	Apr 1	By Balance b/d	60,000
			2014
			Mar 31	By Depreciation	20,000
		80,000			80,000

Q:

The following information are extract from the Trial Balance of M/s Nisha Traders on 31^st March 2017.

Particulars ₹

Sundry Debtors 80,500

Bad debts 1,000

Provision for bad debts 5,000

Additional Information: Bad debts 500

Provision is to be maintained at 2% of Debtors. Prepare bad debts account, Provision for bad debts account and profit and loss account.

A:

Bad Debts Account
Date	Particulars	₹	Date	Particulars	₹
2017			2017
Dec 31	To Balance b/d	1,000	Dec 31	By Provision for Bad Debts	1,500
Dec 31	To Debtors	500
		1,500			1,500

Provision for Bad Debts Account
Date	Particulars	₹	Date	Particulars	₹
2017			2017
Dec 31	To Bad Debts	1,500	Dec 31	By Balance b/d	5,000
Dec 31	To Profit & Loss	1,900
Dec 31	To Balance c/d (₹80,500 – ₹500) @2% = ₹1,600)	1,600
		5,000			5,000

Profit & Loss Account
Date	Particulars	₹	Date	Particulars	₹
2017			2017
Dec 31	To Net Profit	1,900	Dec 31	By Provision for Bad Debts	1,900
		1,900			1,900

Q:

An extract of Trial balance from the books of Tahiliani and Sons Enterprises on March 31, 2017 is given below:

Name of the Account Dr. ₹ Cr. ₹

Sundry debtors 50,000

Bad debts 6,000

Provision for doubtful debts 4,000

Additional Information: Bad debts proved bad but not recorded amounted to ₹2,000. Provision is to be maintained at 8% of Debtors. Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also show the necessary accounts.

A:

Date	Particulars	L.F.	Dr. ₹	Cr. ₹
(i)	Bad Debts		2,000
	To Sundry Debtors			2,000
	(Being bad debts charged from debtors)
(ii)	Provision for Bad Debts		8,000
	To Bad Debts			8,000
	(Being account of bad debts transferred to provision for bad debts account (₹6,000 + ₹2,000) (Previous + New)
(iii)	Profit & Loss		7,840
	To Provision for Doubtful Debts			7,840
	(Being amount of provision for doubtful debts transferred to Profit & Loss Account)

Bad Debts Account
Date	Particulars	₹	Date	Particulars	₹
2017			2017
Dec 31	To Balance b/d	6,000	Dec 31	To Provision for Doubtful Debts	8,000
Dec 31	To Sundry Debtors	2,000
		8,000			8,000

Provision for Doubtful Debts Account
Date	Particulars	₹	Date	Particulars	₹
2017			2017
Dec 31	To Bad Debts (₹6,000 + ₹2,000) (Old +New)	8,000	Jan 1	By Balance c/d	4,000
Dec 31	To Balance c/d (₹48,000 x 8%)	3,840	Dec 31	By Profit & Loss	7,840
		11,840			11,840

Debtor’s Account
Date	Particulars	₹	Date	Particulars	₹
2017			2017
Dec 31	To Balance b/d	50,000	Dec 31	By Bad Debts	2,000
			Dec 31	By Balance c/d	48,000
		50,000			50,000

Q:

A Plant was purchased on 1^st July, 2015 at a cost of ₹3,00,000 and ₹50,000 were spent on its installation. The depreciation is written off at 15% p.a. on the straight line method. The plant was sold for ₹1,50,000 on October 01, 2017 and on the same date a new Plant was installed at the cost of ₹4,00,000 including purchasing value. The accounts are closed on December 31 every year. Show the machinery account and provision for depreciation account for 3 years.

A:

Plant Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
July	To Bank (₹3,00,000 + ₹50,000)	3,50,000	Dec 31	By Balance c/d	3,50,000
		3,50,000			3,50,000
2016			2016
Jan 1	To Balance b/d	3,50,000	Dec 31	By Balance c/d	3,50,000
		3,50,000			3,50,000
2017			2017
Jan 1	To Balance b/d	3,50,000	Oct 1	By Provision for Depreciation	1,18,125
Oct 1	To Bank	4,00,000	Oct 1	By Bank	1,50,000
			Oct 1	By Profit & Loss	81,875
			Dec 31	By Balance c/d	4,00,000
		7,50,000			7,50,000

Provision for Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Dec 31	To Balance c/d	26,250	Dec 31	To Depreciation (₹3,50,000 @ 15% for 6 months)
		26,250			26,250
2016			2016
Dec 31	To Balance c/d	78,750	Jan 1	By Balance b/d	26,250
			Dec 31	By Depreciation	52,500
		78,750			78,750
2017			2017
Oct 1	To Plant (₹26,250+ ₹52,500+₹39,375)	1,18,125	Jan 1	By Balance b/d	78,750
Dec 31	To Balance c/d	15,000	Oct 1	By Depreciation (₹3,50,000 @ 15% for 9 months)	39,375
			Dec 31	By Depreciation (₹4,00,000 x 15% x 3 months)	15,000
		1,33,125			1,33,125

Q:

On January 01, 2014 a Limited Company purchased machinery for ₹20,00,000. Depreciation is provided @15% p.a. on diminishing balance method. On March 01, 2016 one fourth of machinery was damaged by fire and ₹40,000 wer received from the insurance company in full settlement. On September 01, 2016 machinery was purchased by the company for ₹15,00,000. Write up the machinery account from 2016 to 2017. Books are closed on December 31, every year.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2016			2016
Jan 1	To Balance b/d Old Machine ₹(10,83,750 + 3,61,250)	14,45,000	Mar 1	By Depreciation @15% on (₹14,45,000/4) for 2 months	9,031
Sep 1	To Bank New Machinery	15,00,000	Mar 1	By Bank (Insurance)	40,000
			Mar 1	By Profit & Loss (Loss)	3,12,219
			Dec 31	By Depreciation old: (₹14,45,000/4 x 3) x 15% = ₹1,62,563 New: (₹15,00,000 x 15% x 4/12) = ₹75,000	2,37,563
			Dec 31	By Balance c/d: Old: 9,21,187 New: 14,25,000	23,46,187
		29,45,000			29,45,000
2017			2017
Jan 1	To Balance b/d: Old: 9,21,187 New: 14,25,000	23,46,187	Dec 31	By Depreciation: Old: 1,38,177 New: 2,13,750	3,51,927
				By Balance c/d: Old: 7,83,009 New: 12,11,250	19,94,260
		23,46,187			23,46,187

Working Note:

Computation of Profit or Loss: ₹14,45,000 /4 = ₹3,61,250

(-) Depreciation = ₹9,031

= ₹3,52,219

(-) Sales Proceed = ₹40,000

Loss = ₹3,12,219

Q:

Shri Krishan Manufacturing Company purchased 10 machines for ₹75,000 each on July 01, 2014. On October 01, 2016 one of the machines got destroyed by fire and an insurance claim of ₹45,000 was admitted by the company. On the same date another machine is purchased by the company for ₹1,25,000. The company writes off 15% p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2014 to 2017.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2014			2014
Jul 1	To Bank A/c (₹75,000 x 10)	7,50,000	Dec 31	By Depreciation	56,250
			Dec 31	By Balance c/d	6,93,750
		7,50,000			7,50,000
2015			2015
Jan 1	To Balance b/d	6,93,750	Dec 31	By Depreciation	1,04,063
			Dec 31	By Balance c/d	5,89,687
		6,93,750			6,93,750
2016			2016
Jan 1	To Balance b/d	5,89,687	Oct 1	By Depreciation @ 15% on ₹58,968 for 9 months	6,634
Oct 1	To Bank A/c	1,25,000	Oct 1	By Bank (Insurance Company)	45,000
			Oct 1	By Profit & Loss (Loss)	7,335
			Dec 31	By Depreciation Old: 79,608 New: 4,688	84,296
			Dec 31	By Balance c/d Old: 4,51,110 New: 1,20,312	5,71,422
		7,14,687			7,14,687
2017			2017
Jan 1	To Balance b/d Old: 4,51,110 New: 1,20,312	5,71,422	Dec 31	By Depreciation Old: 67,667 New: 18,047	85,714
			Dec 31	By Balance c/d Old: 3,83,443 New: 1,02,265	4,85,708
		5,71,422			5,71,422

Working Note:

Cost of Machine as on 1 Jan, 2016 is (₹5,89,687 /10) = ₹58,968.8 i.e. ₹58,969

Loss on Sale of Machine = ₹58,969 – (Depreciation = ₹6,634 – Claim = ₹45,000) = ₹7,335

Note: As per the solution, the loss on settle of insurance claim is ₹7,335; however, the answer given in the textbook is ₹7,735.

As per the solution, the balance on machine account is ₹4,85,708; however, the answer given in the textbook is ₹4,85,709.

Q:

Kapil Ltd. purchased a machinery on July 01, 2011 for ₹3,50,000. It purchased two additional machines on April 01, 2012 costing ₹1,50,000 and on October 01, 2012 costing ₹1,00,000. Depreciation is provided @10% p.a. on straight line basis. On January 01, 2013 first machinery become useless due to technical changes. This machinery was sold for ₹1,00,000. Prepare machinery account for 4 years on the basis of calendar year.

A:

Books of Kapil Ltd.
Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Jul 1	To Bank	3,50,000	Dec 31	To Depreciation (10% for 6 months)	17,500
			Dec 31	By Balance c/d	3,32,500
		3,50,000			3,50,000
2012			2012
Jan 1	To Balance b/d (M1)	3,32,500	Dec 31	By Depreciation M1: 35,000 M2: 11,250 (9 months) M3: 2,500 (3 months)	48,750
Apr 1	To Bank (M2)	1,50,000	Dec 31	By Balance c/d M1: 2,97,500 M2: 1,38,750 M3: 97,500	5,33,750
Oct 1	To Bank (M3)	1,00,000
		5,82,500			5,82,500
2013			2013
Jan 1	To Balance b/d M1: 2,97,500 M2: 1,38,750 M3: 97,500	5,33,750	Jan 1 Jan 1	By Bank (M1) By Profit & Loss (Loss)	1,00,000 1,97,500
			Dec 31	By Depreciation M2: 15,000 M3: 10,000	25,000
			Dec 31	By Balance c/d M2: 1,23,750 M3: 87,500	2,11,250
		5,33,750			5,33,750
2014			2014
Jan 1	To Balance b/d M2: 1,23,750 M3: 87,500	2,11,250	Dec 31	By Depreciation M2: 15,000 M3: 10,000	25,000
			Dec 31	By Balance c/d M2: 1,08,750 M3: 77,500	1,86,250
		2,11,250			2,11,250
2015
Jan 1	To Balance b/d M2: 1,08,750 M3: 77,500	1,86,250

Q:

Saraswati Ltd. purchased machinery costing ₹10,00,000 on January 01, 2011. A new machinery was purchased on 01 May, 2012 for ₹15,000 and another on July 01, 2014 for ₹12,00,000. A part of the machinery which originally cost ₹2,00,000 in 2011 was sold for ₹75,000 on October 31, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is proved at 10% p.a. on original cost and account are closed on December 31, every year.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Jan 1	To Bank M1 ₹(8,00,000 + 2,00,000)	10,00,000	Dec 31	By Balance c/d	10,00,000
		10,00,000			10,00,000
2012			2012
Jan 1	To Balance b/d (M1)	10,00,000	Dec 31	By Balance c/d	25,00,000
May 1	To Bank (M2)	15,00,000
		25,00,000			25,00,000
2013			2013
Jan 1	To Balance b/d	25,00,000	Dec 31	By Balance c/d	25,00,000
		25,00,000			25,00,000
2014			2014
Jan 1	To Balance b/d	25,00,000	Oct 31	By Machinery Disposal	2,00,000
Jul 1	To Bank (M3)	12,00,000	Dec 31	By Balance c/d M1: 8,00,000 M2: 15,00,000 M3: 12,00,000	35,00,000
		37,00,000			37,00,000
2015			2015
Jan 1	To Balance b/d M1: 8,00,000 M2: 15,00,000 M3: 12,00,000	35,00,000	Dec 31	By Balance c/d M1: 8,00,000 M2: 15,00,000 M3: 12,00,000	35,00,000
		35,00,000			35,00,000

Provision for Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Dec 31	To Balance c/d	1,00,000	Dec 31	By Depreciation	1,00,000
		1,00,000			1,00,000
2012			2012
Dec 31	To Balance c/d	3,00,000	Jan 1	By Balance b/d	1,00,000
			Dec 31	By Depreciation M1: 1,00,000 M2: 1,00,000 (Depreciation on M2 for 8 months)	2,00,000
		3,00,000			3,00,000
2013			2013
Dec 31	To Balance b/d	5,50,000	Jan 1	By Balance b/d	3,00,000
			Dec 31	By Depreciation M1: 1,00,000 M2: 1,50,000	2,50,000
		5,50,000			5,50,000
2014			2014
Jan 31	To Machinery Disposal	76,667	Jan 1	By Balance b/d	5,50,000
Dec 31	To Balance c/d	7,80,000	Oct 31	By Depreciation	16,667
			Dec 31	By Depreciation M1: 80,000 M2: 1,50,000 M3: 60,000	2,90,000
		8,56,667			8,56,667
2015			2015
Dec 31	To Balance c/d	11,30,000	Jan 1	By Balance b/d	7,80,000
			Dec 31	By Depreciation M1: 80,000 M2: 1,50,000 M3: 1,20,000	3,50,000
		11,30,000			11,30,000

Machinery Disposal Account
Date	Particulars	₹	Date	Particulars	₹
2014			2014
Oct 31	To Machinery	2,00,000	Oct 31	By Depreciation	76,667
			Oct 31	By Bank (Sales Proceed)	75,000
			Oct 31	By Profit & Loss (Loss on Sale)	48,333
		2,00,000			2,00,000

Working Note:

Computation of Profit or Loss on Disposal:

Total Depreciation charged on Machine till Oct 1, 2014:

₹20,000 + ₹20,000 + ₹20,000 + ₹16,667 = ₹76,667

(2011) (2012) (2013) (2004 Oct)

Value of Machine ob Oct 1, 2014:

= ₹2,00,000 – ₹76,667 = ₹1,23,333

Loss on Sale of Machine:

= ₹1,23,333 - ₹75,000 = ₹48,333 (Loss)

Note: As per the solution, the balance of Machinery Disposal Account transferred to Profit and Loss Account is ₹48,333; however, as per the textbook the answer is ₹58,333.

Q:

Carriage Transport Company purchased 5 trucks at the cost of ₹2,00,000 each on April 01, 2011. The company writes off depreciation @20% p.a. on original cost and closes its books on December 31, every year. On October 01, 2013 one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay ₹70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for ₹1,00,000 and spent ₹20,000 on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2013. Also give truck account if truck disposal account is prepared.

A:

Truck Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Apr 1	To Bank	10,00,000	Dec 31	By Balance c/d	10,00,000
		10,00,000			10,00,000
2012			2012
Jan 1	To Balance b/d	10,00,000	Dec 31	By Balance c/d	10,00,000
		10,00,000			10,00,000
2013			2013
Jan 1	To Balance b/d (T1)	10,00,000	Oct 1	By Truck Disposal	2,00,000
Oct 1	To Bank (T2)	1,20,000	Dec 31	By Balance c/d	9,20,000
		11,20,000			11,20,000

Provision for Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2011			2011
Dec 31	To Balance c/d	1,50,000	Dec 31	By Depreciation	1,50,000
		1,50,000			1,50,000
2012			2012
Dec 31	To Balance c/d	3,50,000	Jan 1	By Balance b/d	1,50,000
			Dec 31	By Depreciation	2,00,000
		3,50,000			3,50,000
2013			2013
Oct 1	To Truck Disposal	1,00,000	Jan 1	By Balance b/d	3,50,000
Dec 31	To Balance c/d	4,46,000	Oct 31	By Depreciation (till Oct. 9 months)	30,000
			Dec 31	By Depreciation Old T1: 1,60,000 New T2: 6,000	1,66,000
		5,46,000			5,46,000

Truck Disposal Account
Date	Particulars	₹	Date	Particulars	₹
2013			2013
Oct 1	To Truck A/c	2,00,000	Oct 1	By Provision for Depreciation	1,00,000
			Oct 1	By Insurance Co	70,000
			Oct 1	By Profit & Loss (Loss on Sale)	30,000
		2,00,000			2,00,000

Working Note:

Total Depreciation charged on truck @ 20%
Dec 2011	₹ 30,000
Dec 2012	₹ 40,000
Oct 2013	₹ 30,000
	₹ 1,00,000

Cost of truck at disposal:

= ₹2,00,000 – ₹1,00,000 = ₹1,00,000

Profit or Loss on sales of truck:

= ₹1,00,000 – ₹70,000 = ₹30,000 (Loss)

Q:

M/s Excel Computers has a debit balance of ₹50,000 (original cost ₹1,20,000) in computers account on April 01, 2010. On July 01, 2010 it purchased another computer costing ₹2,50,000. One more computer was purchased on January 01, 2011 for ₹30,000. On April 01, 2014 the computer which was purchased on July 01, 2010 became obsolete and was sold for ₹20,000. A new version of the IBM computer was purchased on August 01, 2014 for ₹80,000. Show computers account in the books of Excel Computers for the years ended on March 31, 2011, 2012, 2013, 2014 and 2015. The computer is depreciated @10% p.a. on straight line method basis.

A:

Computer Account
Date	Particulars	₹	Date	Particulars	₹
2010			2011
Apr 1	To Balance b/d	50,000	Mar 31	By Depreciation C1: 12,000 C2: 18,750 C3: 750	31,500
Jul 1	To Bank	2,50,000
Jan 1	To Bank	30,000	Mar 31	By Balance c/d C1: 38,000 C2: 2,31,250 C3: 29,250	2,98,500
		3,30,000			3,30,000
2011			2012
Apr 1	To Balance b/d C1: 38,000 C2: 2,31,250 C3: 29,250	2,98,500	Mar 31	By Depreciation C1: 12,000 C2: 25,000 C3: 3,000	40,000
			Mar 31	By Balance c/d C1: 26,000 C2: 2,06,250 C3: 26,250	2,58,500
		2,98,500			2,98,500
2012			2013
Apr 1	To Balance b/d C1: 26,000 C2: 2,06,250 C3: 26,250	2,58,500	Mar 31	By Depreciation C1: 12,000 C2: 25,000 C3: 3,000	40,000
			Mar 31	By Balance c/d C1: 14,000 C2: 1,81,250 C3: 23,250	2,18,500
		2,58,500			2,58,500
2013			2014
Apr 1	To Balance b/d C1: 14,000 C2: 1,81,250 C3: 23,250	2,18,500	Mar 31	By Depreciation C1: 12,000 C2: 25,000 C3: 3,000	40,000
			Mar 31	By Balance c/d C1: 2,000 C2: 1,56,250 C3: 20,250	1,78,500
		2,18,500			2,18,500
2014			2014
Apr 1	To Balance b/d C1: 2,000 C2: 1,56,250 C3: 20,250	1,78,500	Apr 1	By Bank (C2) By Profit & Loss	20,000 1,36,250
			2015
Aug 1	To Bank	80,000	Mar 31	By Depreciation C1: 2,000 C2: 3,000 C3: 5,333	10,333
			Mar 31	By Balance c/d C1: Nil C2: 17,250 C3: 74,667	91,917
		2,58,500			2,58,500

Note:

The answer given in the textbook, the closing balance as on 31^st March, 2015 is ₹83,917 but as per the solution the correct closing balance as on 31^st March, 2015 is ₹91,917.

Q:

The following balances appear in the books of Crystal Ltd. on Jan 01, 2015: Machinery account on: ₹15,00,000; Provision for depreciation account: ₹5,50,000 On April 01, 2015 a machinery which was purchased on January 01, 2012 for ₹2,00,000 was sold for ₹75,000. A new machine was purchased on July 01, 2015 for ₹6,00,000. Depreciation is provided on machinery at 20% p.a. on straight line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2015.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Jan 1	Balance b/d		Apr 1	Machinery Disposal	2,00,000
	₹(13,00,000 + 2,00,000)	15,00,000	Dec 31	Balance c/d	19,00,000
Jul 1	Bank A/c	6,00,000
		21,00,000			21,00,000

Provision for Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Apr 1	To Machinery Disposal	1,30,000	Jan 1	By Balance c/d	5,50,000
Dec 31	To balance c/d	7,50,000	Apr 1	By Depreciation	10,000
			Dec 31	By Depreciation: M1: 2,60,000 M2: 60,000	3,20,000
		8,80,000			8,80,000

Machinery Disposal Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Apr 1	To Machinery	2,00,000	Apr 1	By Provision for Depreciation	1,30,000
Apr 1	To Profit & Loss (profit on sale of machine)	5,000	Apr 1	By Bank	75,000
		2,05,000			2,05,000

Working Note:

Depreciation charged on ₹2,00,000 of machinery in past three years:

2012 @ 20% = ₹40,000

2013 @ 20% = ₹40,000

2014 @ 20% = ₹40,000

2015 @ 20% = ₹10,000 (for three months)

Total Depreciation Charged = ₹1,30,000

Cost of machine on April 1, 2015 = ₹(2,00,000 – 1,30,000) = ₹70,000

Profit on sale of machine = ₹75,000 – ₹70,000 = ₹5,000

Q:

M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2011 for ₹1,00,000. On July 01, 2012 another machine costing ₹2,50,000 was purchased. The machine purchased on April 01, 2011 was sold for ₹25,000 on October 01, 2015. The company charges depreciation @ 15% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2016.

A:

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2011			2012
Apr 1	To Bank	1,00,000	Mar 21	By Depreciation	15,000
				By Balance c/d	85,000
		1,00,000			1,00,000
2012			2013
Apr 1	To Balance b/d M1:	85,000	Mar 31	By Depreciation M1: 15,000 M2: 28,125	43,125
Jul 1	To Bank M2:	2,50,000	Mar 31	By Balance c/d M1: 70,000 M2: 2,21,875	2,91,875
		3,35,000			3,35,000
2013			2014
Apr 1	To Balance b/d M1: 70,000 M2: 2,21,875	2,91,875	Mar 31	By Depreciation M1: 15,000 M2: 37,500	52,500
			Mar 31	By Balance c/d M1: 55,000 M2: 1,84,375	2,39,375
		2,91,875			2,91,875
2014			2015
Apr 1	To Balance b/d M1: 55,000 M2: 1,84,375	2,39,375	Mar 31	By Depreciation M1: 15,000 M2: 37,500	52,500
			Mar 31	By Balance c/d M1: 40,000 M2: 1,46,875	1,86,875
		2,39,375			2,39,375
2015			2015
Apr 1	To Balance c/d M1: 40,000 M2: 1,46,875	1,86,875	Oct 1	By Depreciation	7,500
			Oct 1	By Machinery Disposal	32,500
			Oct 1	By Depreciation M2	37,500
			Mar 31	By Balance c/d M2	1,09,375
		1,86,875			1,86,875

Machinery Disposal Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Oct 1	To Machinery	32,500	Oct 1	By Bank	25,000
			Oct 1	By Profit & Loss	7,500
		32,500			32,500

Q:

Azad Ltd. purchased furniture on October 01, 2014 for ₹4,50,000. On March 01, 2015 it purchased another furniture for ₹3,00,000. On July 01, 2016 it sold off the first furniture purchased in 2014 for ₹2,25,000. Depreciation is provided at 15% p.a. on written down value method each year. Accounts are closed each year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on March 31, 2015, March 31, 2016 and March 31, 2017. Also give the above two accounts if furniture disposal account is opened.

A:

Furniture Account
Date	Particulars	₹	Date	Particulars	₹
2014			2015
Oct 1	To Bank F1:	4,50,000	Mar 31	By Balance c/d	7,50,000
2015
Mar 1	To Bank F2:	3,00,000
		7,50,000			7,50,000
2015			2016
Apr 1	To Balance b/d F1: 4,50,000 F2: 3,00,000	7,50,000	Mar 31	By Balance c/d F1: 4,50,000 F2: 3,00,000	7,50,000
		7,50,000			7,50,000
2016			2016
Apr 1	To Balance b/d F1: 4,50,000 F2: 3,00,000	7,50,000	Jul 1	By Furniture Disposal F1:	4,50,000
			2017
			May 31	By Balance c/d F2:	3,00,000
		7,50,000			7,50,000

Accumulated Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2015			2015
Mar 31	To Balance c/d	37,500	Mar 31	By Depreciation F1: 33,750 F2: 3,750	37,500
		37,500			37,500
2016			2015
May 31	To Balance c/d	1,44,376	Apr 1	By Balance b/d	37,500
			2016
			Mar 31	By Depreciation F1: 62,438 F2: 44,438	1,06,876
		1,44,376			1,44,376
2016			2016
Jul 1	To Furniture Disposal	1,09,456	Apr 1 Jul 1	By Balance b/d By Depreciation	1,44,376 13,268
2017			2017
Mar 31	To Balance c/d	85,960	Mar 31	By Depreciation	37,772
		1,95,416			1,95,416

Furniture Disposal Account
Date	Particulars	₹	Date	Particulars	₹
2016			2016
Jul 1	To Furniture	4,50,000	Jul 1	By Accumulated Dep.	1,09,456
			Jul 1	By Bank (Sales Proceed)	2,50,000
			Jul 1	By Profit & Loss (Loss on Sale of Furniture)	1,15,544
		4,50,000			4,50,000

Working Note:

Computation of Profit or Loss on Sale of Furniture
Total Depreciation Charged	₹
31 March, 2014	33,750
31 May, 2016	62,438
1 July, 2016	13,268
	1,09,456

Cost of furniture at the date of disposal (1 July, 2016)
	₹
Cost of Furniture	4,50,000
Less: Depreciation	(1,09,456)
	3,40,554
Less: Sales Proceed	(2,25,000)
Loss	1,15,544

Note: As per the solution, the loss on sale of furniture is ₹1,15,544 whereas, as per the textbook, the balance is ₹1,15,546.

As per the solution, the balance of provision for depreciation accounts is ₹85,960 whereas, as per the textbook, the balance is ₹85,959.

Q:

Ganga Ltd. purchased a machinery on January 01, 2014 for ₹5,50,000 and spent ₹50,000 on its installation. On September 01, 2014 it purchased another machine for ₹3,70,000. On May 01, 2015 it purchased another machine for ₹8,40,000 (including installation expenses). Depreciation was provided on machinery @10% p.a. on original cost method annually on December 31. Prepare:

Machinery account and depreciation account for the years 2014, 2015, 2016 and 2017.

If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2014, 2015, 2016 and 2017.

A:

(a)

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2014			2014
Jan 1	To Bank M1: ₹(5,50,000 +50,000)	6,00,000	Dec 31	By Depreciation M1: 60,000 M2: 12,333	72,333
Sep 1	To Bank	3,70,000	Dec 31	By Balance c/d M1: 5,40,000 M2: 3,57,667	8,97,667
		9,70,000			9,70,000
2015			2015
Jan 1	To Balance b/d M1: 5,40,000 M2: 3,57,667	8,97,667	Dec 31	By Depreciation M1: 60,000 M2: 37,000 M3: 56,000	1,53,000
May 1	To Bank M3: 8,40,000	8,40,000	Dec 31	By Balance c/d M1: 4,80,000 M2: 3,20,667 M3: 7,84,000	15,84,667
		17,37,667			17,37,667
2016			2016
Jan 1	To Balance b/d M1: 4,80,000 M2: 3,20,667 M3: 7,84,000	15,84,667	Dec 31	By Depreciation M1: 60,000 M2: 37,000 M3: 84,000	1,81,000
			Dec 31	By Balance c/d M1: 4,20,000 M2: 2,83,667 M3: 7,00,000	14,03,667
		15,84,667			15,84,667
2017			2017
Jan 1	To Balance b/d M1: 4,20,000 M2: 2,83,667 M3: 7,00,000	14,03,667	Dec 31	By Depreciation M1: 60,000 M2: 37,000 M3: 84,000	1,81,000
			Dec 31	By Balance c/d M1: 3,60,000 M2: 2,46,667 M3: 6,16,000	12,22,667
		14,03,667			14,03,667

Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2014			2014
Dec 31	To Machinery	72,333	Dec 31	By Profit & Loss	72,333
		72,333			72,333
2015			2015
Dec 31	To Machinery:	1,53,000	Dec 31	By Profit & Loss	1,53,000
		1,53,000			1,53,000
2016			2016
Dec 31	To Machinery:	1,81,000	Dec 31	By Profit & Loss	1,81,000
		1,81,000			1,81,000
2017			2017
Dec 31	To Machinery:	1,81,000	Dec 31	By Profit & Loss	1,81,000
		1,81,000			1,81,000

Note: As per the solution, the balance of machine account, as on 01/01/2015 is ₹12,22,667; whereas, as per the textbook, the balance is ₹12,22,666.

(b)

Machinery Account
Date	Particulars	₹	Date	Particulars	₹
2014			2014
Jan 1	To Bank M1: ₹(5,50,000 +50,000)	6,00,000	Dec 31	By Balance c/d M1: 6,00,000 M2: 3,70,000	9,70,000
Sep 1	To Bank	3,70,000
		9,70,000			9,70,000
2015			2015
Jan 1	To Balance b/d M1: 6,00,000 M2: 3,70,000	9,70,000	Dec 31	By Balance c/d M1: 6,00,000 M2: 3,70,000 M3: 8,40,000	18,10,000
May 1	To Bank M3:	8,40,000
		18,10,000			18,10,000
2016			2016
Jan 1	To Balance b/d M1: 6,00,000 M2: 3,70,000 M3: 8,40,000	18,10,000	Dec 31	By Balance c/d M1: 6,00,000 M2: 3,70,000 M3: 8,40,000	18,10,000
		18,10,000			18,10,000
2017			2017
Jan 1	To Balance b/d M1: 6,00,000 M2: 3,70,000 M3: 6,40,000	18,10,000	Dec 31	By Balance c/d M1: 6,00,000 M2: 3,70,000 M3: 8,40,000	18,10,000
		18,10,000			18,10,000

Provision for Depreciation Account
Date	Particulars	₹	Date	Particulars	₹
2014			2014
Dec 31	To Balance c/d	72,333	Dec 31	By Depreciation	72,333
		72,333			72,333
2015			2015
Dec 31	To Balance c/d	2,25,333	Dec 31	By Balance b/d	72,333
				By Depreciation	1,53,000
		2,25,333			2,25,333
2016			2016
Dec 31	To Balance c/d	4,06,333	Dec 31	By Balance b/d	2,25,333
				By Depreciation	1,81,000
		4,06,333			4,06,333
2017			2017
Dec 31	To Balance c/d	5,87,333	Dec 31	By Balance b/d	4,06,333
				By Depreciation	1,81,000
		5,87,333			5,87,333

Note: As per the solution, the balance of provision for depreciation account, as on 01/01/2015 is ₹5,87,333; whereas, as per the textbook, the balance is ₹5,87,334.

Q:

Describe in detail two methods of recording, depreciation. Also give the necessary journal entries.

A:

In the books of account, there are two types of arrangements for recording depreciation on fixed assets:

Charging depreciation to asset account or
Creating provision for depreciation/ Accumulated depreciation account.

(1) Charging Depreciation to Asset Account:

According to this, depreciation is deducted from the depreciable cost of the asset (credited to the asset account) and charged (or debited) to profit and loss account.

Journal entries under this recording method are as follows:

1. for recording purchase of asset:
Asset A/c	Dr.
To Bank/ Vendor A/c
(Only in the year of purchase) (With the cost of asset including installation, freight, etc.)
2. Following two entries are recorded at the end of every year
(a) for deducting depreciation amount from the cost of the asset.
Depreciation A/c		Dr.
To Asset A/c
(with the amount of depreciation)
(b) for changing depreciation to profit & loss account
Profit & Loss A/c	Dr.
To Depreciation A/c
(with the amount of depreciation)
3. Balance Sheet Treatment
When this method is used, the fixed asset appears at its net book value (i.e cost less depreciation charged till date) on the asset side of the balance sheet and not at its original cost (also known as historical cost)

(2) Creating Provision for Depreciation Account/ Accumulated Depreciation Account:

This method is designed to accumulate the depreciation provided on asset in a separate account generally called ‘Provision for Depreciation’ or ‘Accumulated Depreciation’ account.

Characteristics:

Asset account continues to appear at its original cost year after year over its entire life:

Depreciation is accumulated on a separate account instead of being adjusted in the asset account at the end of each accounting period.

Following journal entries are recorded under this method:

1. For recording purchase of asset
Asset A/c	Dr.
To Bank/Vendor A/c
(Only in the year of purchase) (with the cost of asset including installation, expenses etc) (cash/credit purchase)
2. Following two journal entries are recorded at the end of each year:
(a) For crediting depreciation amount to provision for depreciation account
Depreciation A/c		Dr.
To Provision for depreciation A/c
(with the amount of depreciation)
(b) for charging depreciation to profit and loss account
Profit & loss	Dr.
To Depreciation A/c
(With the amount of depreciation)
3. Balance Sheet Treatment:
In the balance sheet, the fixed asset continues to appear at its original cost on the asset side. The depreciation charged till that date appears in the provision for depreciation account, which is shown either on the ‘Liabilities side” of the balance sheet or by way of deduction from the original cost of the asset concerned on the asset side of the balance sheet.

NCERT Solutions For Class 11 Accountancy Chapter 12 Depreciation, Provisions and Reserves

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Particulars	₹
Sundry Debtors	80,500
Bad debts	1,000
Provision for bad debts	5,000
Additional Information: Bad debts	500

Name of the Account	Dr. ₹	Cr. ₹
Sundry debtors	50,000
Bad debts	6,000
Provision for doubtful debts		4,000