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 =
12, 00,000;Provision for Depreciation Account =
4,65,000.On 1st July, 2017, a machinery which was purchased on 1st April, 2014 for
1,80,000 was sold for 75,000 plus CGST and SGST @ 6% each and on the same date another machinery was purchased for 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:1View AnswerAnswer:
17,250.Explanation:
Particulars
(
)Cost of Machine (1st April, 2014)
1,80,000
Less: Provision for Depreciation up to 1st July, 2017
(
27,000 + 27,000 + 27,000 + 6,750)87,750
Book Value on 1st July, 2017
92,250
Less: Sale Proceeds
75,000
Loss on Sale of Machinery
17,250
-
Q2
Sagar purchased a machine on 1st January, 2018 for
7,50,000 plus IGST @ 12% each. He paid 30,000 for loading/unloading and carriage expenses to bring the machine to factory. He further incurred 37,500 for installing the machine.The amount debited to to Machinery Account will be
Marks:1View AnswerAnswer:
8,17,500Explanation:
Amount to be Debited to Machinery A/c
Cost of Machine (Without IGST)
7,50,000
Loading/Unloading & Carriage Expenses
30,000
Installation Charges
37,500
8,17,500
-
Q3
Sam purchased a Machine A by cheque for
1,50,000 plus CGST and SGST @ 6% each on 1st October, 2016. Another Machine B was purchased for 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:1View AnswerAnswer:
2,68,800.Explanation:
Particulars
L.F.
Dr.
Cr.
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.
Cr.
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 =
1,68,000 + 1,00,800 = 2,68,800. -
Q4
Raj purchased a Machine A by cheque for
1,50,000 plus CGST and SGST @ 6% each on 1st July, 2016.He further incurred 15,000 for installing the machine.Another Machine B was purchased for
90,000 plus IGST @ 12% by cheque on 1st February, 2018.Again he further incurred 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:1View AnswerAnswer:
2,62,500Explanation:
Amount to be Debited to Machinery A/c
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
-
Q5
Samir purchased a machine on 1st March, 2018 for
10,00,000 plus CGST and SGST @ 6% each. He paid 40,000 for loading/unloading and carriage expenses to bring the machine to factory. He further incurred 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:6View AnswerAnswer:
(a)
Amount Paid to Vendor of Machine:
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:
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.(
)Cr.(
)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)
