Application of Depreciation

  • Assets account is prepared in the books to record all transactions relating to assets like further cost of assets, sale of assets, etc. Cost of the asset includes its purchase price, transportation cost, installation etc.
  • Depreciation account is prepared to record the total amount of depreciation charged on a particular asset for different accounting periods. It is a nominal account.
  • Factors affecting the depreciation of an asset are cost of an asset, scrap value and useful life.
  • Different methods of providing depreciation are Straight Line Method, Diminishing Balance Method, etc.  
  • Under Straight Line Method, fixed amount of depreciation is charged on the asset every year. The amount of depreciation remains same throughout the life of fixed asset. This method is also called Equal Installment Method or Original Cost Method.
  • In this case, annual depreciation is equal to cost of the asset minus estimated scrap value divided by useful life of the asset.
  • Under Diminishing Balance Method, depreciation is charged at fixed rate on the reducing balance every year.
  • This method is based upon the assumption that the benefit accruing to business from assets keeps on diminishing as the asset becomes old.
  • The difference between straight line method and diminishing balance method is that, in case of straight line method the value of an assets can reduce to zero, while in case of diminishing balance method the book value of an asset can never be zero, etc.
  • Under Diminishing Balance Method, depreciation is charged at fixed rate on the reducing balance every year. Since book value keeps on reducing by the annual charge of depreciation, it is also known as reducing balance method.
  • Amount of depreciation is equal to diminished value of asset multiplied by rate of depreciation.
  • Sale of an asset can take place either at the end of its useful life or during its useful life.
  • Depreciation is provided on such asset up to the date of sale.
  • Profit or loss on sale of asset is also computed. When provision for depreciation account is maintained, the amount of depreciation is accumulated in this account only. For recording sale of assets sometimes,
  • Asset Disposal Account is opened. It gives a full picture of all the transactions related to asset disposal at one place.

To Access the full content, Please Purchase

  • Q1

    In the books of Gupta Ltd. as on 1st April, 2017.

    Machinery Account = INR 12, 00,000;

    Provision for Depreciation Account = INR 4,65,000.

    On 1st July, 2017, a machinery which was purchased on 1st April, 2014 for INR1,80,000 was sold for INR 75,000 plus CGST and SGST @ 6% each and on the same date another machinery was purchased for INR 48,000 plus CGST and SGST @ 6% each. The firm charges depreciation @ 15% p.a. on Original Cost Method and closes its books its books on 31st March every year.

    Loss on sale of Machinery account will be debited by

    Marks:1
    Answer:

    INR17,250.

    Explanation:

    Particulars

    (INR)

    Cost of Machine (1st April, 2014)

    1,80,000

    Less: Provision for Depreciation up to 1st July, 2017

    (INR27,000 + INR27,000 + INR27,000 + INR6,750)

     

     

    87,750

    Book Value on 1st July, 2017

    92,250

    Less: Sale Proceeds

    75,000

    Loss on Sale of Machinery

    17,250

    View Answer
  • Q2

    Sagar purchased a machine on 1st January, 2018 for INR 7,50,000 plus IGST @ 12% each. He paid INR 30,000 for loading/unloading and carriage expenses to bring the machine to factory. He further incurred INR 37,500 for installing the machine.

    The amount debited to to Machinery Account will be

    Marks:1
    Answer:

    INR 8,17,500

    Explanation:

    Amount to be Debited to Machinery A/c

    INR

    Cost of Machine (Without IGST)

    7,50,000

    Loading/Unloading & Carriage Expenses

    30,000

    Installation Charges

    37,500

     

    8,17,500

    View Answer
  • Q3

    Sam purchased a Machine A by cheque for INR 1,50,000 plus CGST and SGST @ 6% each on 1st October, 2016. Another Machine B was purchased for INR 90,000 plus IGST @ 12% by cheque on 1st April, 2018. Depreciation is charged @ 10% p.a. by the straight line method. Accounts are closed every year on 31st March.

    Total amount paid for purchase of two machines will be

    Marks:1
    Answer:

    INR2,68,800.

    Explanation:

    Particulars

    L.F.

    Dr. INR

    Cr. INR

    Machine A A/c

     

    1,50,000

     

    Input CGST A/c

     

    9,000

     

    Input SGST A/c

     

    9,000

     

    To Bank A/c

     

     

    1,68,000

     

    Particulars

    L.F.

    Dr. INR

    Cr. INR

    Machine B A/c

     

    90,000

     

    Input IGST A/c

     

    10,800

     

    To Bank A/c

     

     

    1,00,800

     

    The total amount paid for two machines = INR1,68,000 + INR1,00,800 = INR2,68,800.

    View Answer
  • Q4

    Raj purchased a Machine A by cheque for INR 1,50,000 plus CGST and SGST @ 6% each on 1st July, 2016.He further incurred INR 15,000 for installing the machine.

    Another Machine B was purchased for INR 90,000 plus IGST @ 12% by cheque on 1st February, 2018.Again he further incurred INR 7,500 for installing the machine.Depreciation is charged @ 10% p.a. by the straight line method. Accounts are closed every year on 31st march.

    The amount debited to to Machinery Account will be

    Marks:1
    Answer:

    INR2,62,500

    Explanation:

    Amount to be Debited to Machinery A/c

    INR

    Cost of Machine A (Without CGST and SGST @ 6% each)

    1,50,000

    Installation Charges

    15,000

    Cost of Machine B (Without IGST @ 12%)

    90,000

    Installation Charges

    7,500

     

    2,62,500

    View Answer
  • Q5

    Samir purchased a machine on 1st March, 2018 for INR 10,00,000 plus CGST and SGST @ 6% each. He paid INR 40,000 for loading/unloading and carriage expenses to bring the machine to factory. He further incurred INR 50,000 for installing the machine. Determine:

    (a) How much amount did Samir pay to the vendor of machine?

    (b) How much amount will be debited to Machinery Account?

    (c ) Pass the journal entries giving effect to the transaction.

    Marks:6
    Answer:

    (a)

    Amount Paid to Vendor of Machine:

    INR

    Value (Cost) of Machine

    10,00,000

    Add: CGST @ 6%

    60,000

    SGST @ 6%

    60,000

    11,20,000

    (b)

    Amount to be Debited to Machinery Account:

    INR

    Cost (without CGST and SGST)

    10,00,000

    Loading/unloading and Carriage Expenses

    40,000

    Installation Charges

    50,000

    10,90,000

    (c)

    JOURNAL ENTRIES

    Date

    Particulars

    L.F.

    Dr.(INR)

    Cr.(INR)

    2018 Mar.

    1

    Machinery A/c

    Dr.

    10,00,000

    Input CGST A/c

    Dr.

    60,000

    Input SGST A/c

    Dr.

    60,000

    To Cash/Bank A/c

    11,20,000

    (being the machinery purchased)

    Machinery A/c

    Dr.

    90,000

    To Cash/Bank A/c

    90,000

    (Being loading/unloading, carriage and installation charges paid)

    View Answer