COST OF FIXED ASSET: INCLUDES PURCHASE COST OF MACHINE.

MEANING IT WOULD INCLUDE ONLY CAPITAL

EXPENDITURES.

Capital expenditure: Asset ko kharidnay se le k us ko use krne tak ki cost.

and cost incurred to increase earning and enhancing value. eg. purchase cost< insurance in transit, import duty,
replacement cost.

Revenue expenditure: recurring expense. maintenance, selling expense.

example:

Change of driving seat of truck REVENUE EXP

monthly maintenance REVENUE EXP

purchase of office furniture CAPITAL EXP

purchase of hard disk for computer to increase its storage cost CAPITAL EXP

cost of repainting a building REVENUE EXP

annual maintenance of plant and equipment REVENUE EXP

CAPITAL EXPENDITURES: cost incurred for improvement, betterment and expansion of the asset are classified
as capital exp. eg; extension of building, major overhauling of machine, purchase of patents, installation and
test run costs.

TRADE DISCOUNTS: are discounts allowed on bulk purchasing. discount allowed at the time of purchase.

CASH DISCOUNT: discounts allowed on early payments. eg. lets say supplier allowed period within an offer to
get 5% discount if you pay immediately.

SALES TAX: are input tax (on purchase). the byer has to pay the cost to acquire to asset.
OTHER EXPENDITURES: expenses incurred after the purchase of an asset, eg, installation cost< import duty,
insurance in transit, delivery and transportation cost.

REVENUE EXPENDITURE: Cost incurred for maintaining the asset in proper working conditions.

eg; annual repair and maintenance, insurance, yearly tax, insurance premium.

FORMAT OF CALCULATION OF TOTAL COST OF FIXED ASSET:

List price of machine xxx

less: trade discount (xxx)

invoice cost xxx

less: cash discount (xxx)

amount paid xxx

additional costs:

insurance in transit xxx

custom duty xxx

replacement cost xxx

freight charges xxx

installation and testing xxx + xxx

total cost xxx

QUESTION:
Raja &co. purchased a plant at a list price of RS. 425000 at 6% trade discount, term 3/15, n/90. the company
paid RS. 2025 for insurance in transit and RS. 200 for transporting. purchased electric goods at Rs.8500 and
paid to electrical engineer Rs. 8400 for installation of plant. paid Rs. 4500 for foundation of plant. the company
also purchased a special part of plant at a replacement cost of Rs. 2500 also paid Rs.1500 for the cost of some
parts which were damage during installation. the company also paid Rs. 995 for annual insurance premium.

QUESTION:

hamza $co. purchased a building at a cost of RS. 750000

paid transfer fees and fees to advocate RS. 16000

made a contract of RS. 50000 for demolishing the building before construction of factory.

paid RS. 10000 to the contractor for demolishing.

made a contract with contractor for the construction of factory at RS. 2700000 and also paid RS. 15000 to an
architect for the map of factory building.

paid in advance to the factory contractor RS. 200000 AND ALSO PAID rs. 20000 to the contractor for
demolishing.

DEPRECIATION:

Allocation of cost of plant asset over the period of time in which services are received from the asset and will
have to use during the period.

Factors of depreciation:

Identify the cost of fixed asset

identify its expected useful life.

identify its expected residual/salvage/scrap value.

select an appropriate method of depreciation.

METHODS OF DEPRECIATION:

STRAIGHT LINE/ FIXED INSTALLMENT METHOD

DIMINISHING/REDUCING/DOUBLE DECLINING METHOD

UNIT OF PRODUCTION/OUTPUT METHOD

PRODUCTION HOUR/WORKING HOUR METHOD

STRAIGHT LINE METHOD:

equal portion of cost is allocated to each year or each month of its useful life. most suitable method where the
use of asset is more or less uniform each year.

formula:

depreciation expense= cost - estimated salvage value

est. life in yrs

written down value/ net book value/ carrying value= cost - accumulated depreciation

QUESTION;

ON JANUARY 5, 2006 OFFICE FURNITURE WAS PURCHASED BY NOMAN MERCHANT AT rs. 48500. its estimated
life was 5 years and scrap value RS. 3500. the accounting year ends on december 31.

req: a. calculate depreciation under straight line method

b. prepare schedule of depreciation for five years

c. record adjusting entries at the end of first and second year

DIMINISHING BALANCE METHOD; depreciation decreases every year and fixed rate of depreciation is applied
to the whole life of asset.

FORMULA;

WRITEN DOWN VALUE * RATE

DEPRECIABLE COST:

TOTAL COST - SALVAGE VALUE

FIXED PERCENTAGE DOUBLE DECLINING BALANCE METHOD:

In this method, rate of depreciation is double the rate of depreciation applied in straight line method. if
rate of depreciation is not known in first year.

formula:

rate of dep= dep for the year (under straight line *100

depreciable cost

computation of double declining rate= rate *2

example question:

ittefaq foundry purchased a plant at a cost of RS. 360000 including all other costs till installation and operation
of plant. its estimated life is 10 yrs. and estimated salvage value is RS. 60000.

req;

a. depreciation under straight line

b. rate of depreciation

c. double declining rate.

d. depreciation under double declining method.

WORKING HOURS METHOD: A more fair distribution of cost of some plant and or machine assets can be
obtained by this method. dep. is calculated on the basis of production hours. 2 steps in this method are:

step 1: rate of dep= cost - salvage value

est. life in hours

step 2: annual depreciation= hours worked * rate of depreciation.

QUESTION:

A machine was purchased for RS. 25000 on 1st september 2003. its salvage value was RS. 5000, useful life was
estimated to be 50000 hours of production.

req:

a. calculate depreciation for year 20003 & 2004 with machine hours 5000 & 6000 respectively.

b. pass adjusting and closing entries at the end of year dec 31 2003& 2004.

PRODUCTION OUTPUT METHOD:

DEPRECIATION RATE= cost - salvage value

est. units produced

depreciation expense= uits produced * rate

QUESTION:

COST OF MACHINE= RS. 21000

EST. SALVAGE VALUE = 1000

EST. LIFE

IN UNITS= 40000

REQ;

a. calculate depreciation of year 1 when machine produced 2000 units and year 2 where machine produced
4000 units.

b. pass the adjusting and closing entries at the end of year 1 &2.
SUM OF YEARS DIGIT METHOD:

DEPRECIATION EXP= DEPRECIABLE VALUE * FRACTION (SUM OF YEAR'S DIGIT)

DEPRECIABLE VALUE= COT - RESIDUAL VALUE.

QUESTION:

A truck was purchased on january 1 2001 for 500000. the truck has residual value of RS. 50000 and est. lifeof 5
yrs.

req: calculate dep exp for each yrs.

DEPRECIABLE COST= 500000-50000= 450000

TOTAL OF EST. LIFE = 15