Depreciation

Q1: K.K & Company purchased a machine on March 01, 2015 at a list price of Rs.50,000 with
a trade discount at 5%. The credit terms were 2/10, n/30.
The payment was made within discount period. The company incurred the following additional
expenditure.
1. 3% sales tax on cash price of machine.
2. Custom duty Rs.10,000
3. Installation and testing cost Rs.12,000.
4. The machine was insured against fire and premium paid Rs.4,000.
5. Insurance in transit Rs.6,000.
6. Transportation cost/Freight in Rs.2,000.
Required.
1) Compute the cost of machine.
2) Compute depreciation for the year ended on 2015 and 2016 by using Straight Line Method,
assuming that the estimated life of machinery was 8 years having scrap value Rs.4,000.
3) Prepare a partial balance sheet showing the machine cost and its allowance for depreciation
as on Dec. 31, 2016.

Computation of Cost of Machine Rs. Rs.

List price of machine 50,000
Less: Trade discount (50,000 x 5%) (2,500)
Invoice price 47,500
Less : Cash discount (47,500 x 2%) (950)
Cash price 46,550
Add : Sales tax (46,550 x 3%) 1,397
Net cash price 47,947
Add : Additional Cost
Custom duty 10,000
Installation and testing charges 12,000
Insurance in transit 6,000
Freight in 2,000
Total additional cost incurred 30,000
Total cost of machine 77,947

Computation of Depreciation Expense by using SLM

Depreciation per year = Cost – Scrap value

Useful life

Depreciation per year = 77,947 – 4,000 = 9,244

8
Depreciation expense for the year 2015 = 9,244 x 10 / 12 = 7,703
Depreciation expense for the year 2016 = 9,244
 KK & Company
Balance Sheet
As On December 31,2016
Assets Equities
Machine 77,947
Less : Allowance for depreciation (16,947)
Written down value 61,000