Unit 8

Illustration 1:
A company purchased Machinery for Rs.1,00,000. Its installation costs amounted to
Rs.10,000. It’s estimated life is 5 years and the scrap value is Rs.5,000. Calculate
the amount and rate of depreciation
Sol:
Total Cost of the Machinery = Price + Installation Cost
= Rs. 1,00,000 + Rs. 10,000
= Rs. 1100000
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡−𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒
Amount of the Depn = 𝐿𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑟𝑦 𝑖𝑛 𝑌𝑒𝑎𝑟𝑠

= (1,10,0000 – 5000) / 5 years

= Rs. 21000
Rate of Depn = Depn / Total Cost * 100
= (Rs. 21000 / Rs. 110000) *100
= 19.09%
Illustration 2:
If the asset is purchased for Rs.1,00,000 and depreciation is to be charged at 10%
p.a. on reducing balance method. Calculate the depreciation for three years.
Sol:
First Year
Total Cost = Rs. 100000
Less: Depn (10% 0n Rs. 100000) = Rs. 10000
2nd Year
Opening Balance = Rs. 90000
Less: Depn (10% on Rs. 90000) = Rs. 9000
3rd Year
Opening Balance = Rs. 81000
Less: Depn (10% on Rs. 81000) = Rs. 8,100
4th Year
Opening Balance = Rs. 72900
Illustration 3:
Raheem & Co. purchased a fixed asset on 1.4.2018 for Rs.2,50,000. Depreciation is
to be provided @10% annually according to the Straight-line method. The books are
closed on 31st March every year. Pass the necessary journal entries, prepare Fixed
asset Account and Depreciation Account for the first three years.
Sol:
Journal Entry in the books Raheem & Co -_______

Date Particular Debit Credit

Rs Rs
1/4/2018 Fixed Assets A/C Dr 2,50,000
To Cash A/C 2,50,000
(Being the fixed assets purchased)
31/3/2019 Depreciation A/C Dr 25000
To Fixed Assets A/C 25000
31/3/2019 Profit and Loss A/C Dr 25000
To Depreciation A/C 25000

Dr Fixed Assets Cr
Date Particular Rs Date Particular Rs
1/4/18 To Cash A/C 250000 31/3/2019 By Depreciation 25000
31/3/2019 By Balance 225000
250000 250000
1/4/19 To Balance 225000 31/3/20 By Depreciation 25000
31/3/20 By Balance 200000
225000 225000
1/4/20 To Balance 200000

Dr Depreciation Account Cr
Date Particular Rs Date Particular Rs
31/3/19 To Fixed Assets 25000 31/3/19 By Profit & Loss 25000

31/3/20 To Dep 25000 31/3/20 By P/L ac 25000

Illustration 4:
A Ltd. purchased a 5 years lease on 1 April 2013 for ₹500000. It is decided to write
off depreciation on lease using the Annuity Method. The rate of interest is presumed
to be 6% p.a. The annuity for ₹1 for 5 years at 6% interest is 0.237396. Prepare the
Lease A/c and the Profit & Loss A/c for 5 years.
Sol:
Depreciation Amount = Rs. 500000 * 0.237396 = Rs. 118698
Dr Lease A/C Cr
Date Particular Rs Date Particular Rs
1/4/13 To Bank A/C 500000 31/3/14 By Depreciation 118698
31/3/14 To Interest A/C 30000
(6% on 500000) By Balance 411302

530000 530000
1/4/14 To Balance 411302 31/3/15 By Depreciation 118698
31/3/15 To interest 24678 By Balance 317282
(6% on 411302)
435980 435980
1/4/15 To Balance 317282 31/3/16 By Depreciation 118698
31/3/16 To interest 19037 By Balance 217621
(6% on 317282) 386319
386319
1/4/16 To Balance 217621 31/3/17 By Depreciation 118698
31/3/17 To interest 13057 By Balance 111980
(6% on 217621)
230678 230678
1/4/16 To Balance 111980 31/3/17 By Depreciation 118698
31/3/17 To interest 6718
(6% on 111980)
118698 118698

Dr Profit and Loss A/C Cr

Date Particular Rs Date Particular Rs
31/3/14 To Depreciation 118698 31/3/14 By Interest 30000
Illustration 5
Ram manufacturing company purchased on 1st April 2002, Machinery for
Rs.1,00,000. After having used it for three years it was sold for Rs. 85,000.
Depreciation is to be provided every year at the rate of 10% per annum on the
straight-line method. Books are closed on 31st March every year. Find out the profit
or loss on sale of machinery
Sol:

1/4/2002 Cost of the Assets = Rs. 1000000

31/3/2003 Less: Dep = Rs. 10000
1/4/2003 Balance = Rs. 90000
31/3/2004 Less: Dep = Rs. 10000
1/4/2004 Balance = Rs. 80000
31/3/2005 Less: Dep = Rs 10000
1/4/2005 Balance = Rs. 70000
Sales Vales = Rs. 85000
Profit = Sales Value – Book Value = Rs. 85000 – Rs. 70000 = Rs. 15000