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OMTEX CLASSES

1. Export Import Ltd financial year closing is 31st December each year. It purchased
the following machinery. On 1st January, 2000 it had purchased a machinery worth Rs.
20,000/-. The company decided to depreciate at 10% on Straight line method on every
year. You are required to show the machinery a/c and depreciation a/c for the
year2000 to 2003.

2. M/s xyz, co. had purchased a machinery on 1.1.98 for Rs. 2,00,000/-. Immediately
it was decided to depreciate the machinery at 15% on Original cost method for every
year. The company’s accounting year is calendar year. On 1st January, 2003 the
company had sold the same machinery for Rs. 1,60,000. You are required to show the
machinery a/c and the depreciation a/c for the year 1998 to 2003.

3. Export Import Ltd financial year closing is 31st December each year. It purchased
the following machinery. On 1st January, 2000 it had purchased a machinery worth Rs.
20,000/-. The company decided to depreciate at 10% on Diminishing Balance method
on every year. You are required to show the machinery a/c and depreciation a/c for the
year2000 to 2003.

4. M/s xyz, co. had purchased a machinery on 1.1.98 for Rs. 2,00,000/-. Immediately
it was decided to depreciate the machinery at 15% on reducing balance method for
every year. The company’s accounting year is calendar year. On 1st January, 2003 the
company had sold the same machinery for Rs. 1,60,000. You are required to show the
machinery a/c and the depreciation a/c for the year 1998 to 2003.

5. From the books of a Limited Company the following particulars regarding its
Machinery are available:
i. Balance on 1.4.1998 Rs. 2,00,000/-
ii. Purchase of new machinery on 1.10.1998 Rs. 80,000/-
iii. Installation charges on the purchase of new machinery Rs. 16,000/-
iv. Sale of machinery on 1.1.1999 Rs. 64,000/-
(The original cost of the machinery sold was Rs. 80,000/- on 1.10.1995)
v. Machinery being depreciated @ 15% p.a. on fixed instalment basis.
vi. The opening balance includes Rs. 1,50,000/- worth machinery purchased on
31.3.1998
Prepare the machinery a/c and Depreciation a/c. in the books of a Ltd. Company.

6. From the Books of M/s OMTEX company the following information are available.
Company’s Financial year closing is 31st December, each year. It purchased the
following machinery.
On 1.4.1996 Machine costing Rs. 30,000
On 1.10.1996 Machine costing Rs. 20,000
On 1.7.1997 Machine costing Rs. 10,000
On 1.1.1998, 1/3 of the Machinery which was installed on 1.04.1996, became
obsolete and was sold for Rs. 3,000/-.The machinery is to be depreciated by a Fixed
Instalment Method at 10% p.a.
Show the Machinery account would appear in the company’s ledger for the years
1996, 1997, 1998.

7. M/s. XYZ Ltd. has imported a machine on 1st July, 1996 for Rs. 80,000 paid
customs duty and freight Rs. 80,000/- and incurred erection charges Rs. 6,000/-.
Another machinery costing Rs. 1.00,000/- was purchased on January,1st 1997. On 1st
OMTEX CLASSES
July, 1998 a portion of the imported machinery (value half) got out of order and was
sold for Rs. 34,800/-. Another machinery was purchased to replace the same for Rs.
50,000/-. Depreciation is to be calculated at 20% p.a. on straight line method. Show
the machinery account for 1996-1998.

8. From the books of M/s. Selvan Ltd. the following particulars regarding its
machinery accounts are available.
a) Balance on January 1,1998 Rs. 25,000/-
b) Purchase of machinery on July 1, 1999 Rs. 10,000/-
c) Sales of machinery on October, 1,1998 Rs. 8,000/-. The original cost of machinery
sold was Rs. 10,000/- on 1st July, 1995.
d) Installation charges of Rs. 2,000/- on the purchase of new machinery.
e) Machinery is being depreciated at 10% per annum on fixed instalment basis.
f) The opening balance includes Rs. 17,500/- worth machinery purchased on 31st
December, 1997.
Prepare “ Machinery Account” in the books of the company”.

9. M/s Omtex co. furnishes you with the following information.


1. Opening Balance in Machinery a/c Rs. 1,00,000/ on 1st Jan. 1993.
2. On 1st April 1993 he purchased Machinery worth Rs. 50,000/-
3. On 1st May, machinery purchased on 1st January,1992 for Rs. 50,000/- was sold for
Rs. 40,000/-
4. On 1st October, machinery purchased on 1st April, 1993 was sold for Rs. 47,500/-
5. Depreciate Machinery at 10% on W.D.V basis. Machinery held for part of the year
is depreciated for the time it is held.

10. The Machinery Account in the books of Ramlal shows debit balance of Rs.
15,000/- on 1st January, 1992.
1. On 1st July, 1992 he purchased a machinery costing Rs. 10,000/-
2. On 1.10.1992 he sold out one old machine for Rs. 2,000/- whose book value in the
beginning of the year was Rs. 3000. Machinery is to be depreciated at 10% on
diminishing balance method. Show the machinery a/c for the year ending 31.12.1992.

11. Mahindra Gina Steel Co. Ltd had bought some items of machinery for Rs.
50,000/-
The machinery was depreciated at 10% p.a. on reducing balance system. In the
beginning of the fourth year (the current year) one machine which was obsolete was
disposed off for Rs. 4,000/- its original cost being Rs. 10,000/-

12. M/s M & Co. commenced business on 1st January.1990, when they purchased
plant and equipment for Rs. 7,00,000/- They adopted a policy of _
i. Charging depreciation at 15% per annum on diminishing balance basis and
ii. Charging full year’s depreciation on additions.
Over the years, their purchases of plant have been:
Date Amount (Rs.)
1.8.1991 1,50,000/-
30.9.1994 2,00,000/-
On 1.1.1994, it was decided to change the method and rate of depreciation to
10% on straight line basis with retrospective effect from 1.01.90, the
adjustment being made the account for the year ending 31st December, 1994.
OMTEX CLASSES
Calculate the difference in depreciation to be adjusted in the Plant & Equipment A/c
on 1.01.1994 and show the ledger account for the year 1994.

OMTEX – CLASSES
F.Y.B.Com ACCOUNTS F.Y.B.Com

DEPRECIATION
13. M/s Vaibhav Enterprises purchased a machinery for Rs. 40,000/- on 1st July, 1996.
Depreciation is provided @10% p.a. on Diminishing Balance Method. On 1st October,
1998, one – forth of the machinery was found unsuitable and disposed off for Rs.
5,600/- On the same date new machinery at a cost of Rs. 15,000/- was purchased.
Writer up Machinery Account for the years 1996 - 1998. The accounts being closed on
every 31st December.

14. The Plant and Machinery a/c of a company had a debit balance of Rs. 1,47,390/-
on 1st Jan, 1997. The company was incorporated in 1994 and has been following the
practice of charging full year’s depreciation every year on the W.D.V basis @15%. In
1997, it was, however, decided to change the method from W.D.V method to the
straight lime with retrospective effect from 1994 and to give effect of the change
while preparing the final account for the year ended 31st Dec, 1997, the rate of
depreciation remaining the same as before. In 1997, new machinery were purchased at
a cost of Rs. 50,000/- All the other machineries were acquired in 1994.
Show the Plant & Machinery a/c from, 1994 to 1997.

15. Precaution Limited Depreciated its machinery at 10% p.a. on Fixed instalment
method. On 31st December,1997 the balance in machinery account was Rs. 1,58,000
(Debit) at written down value. Out of this, machinery with original cost of Rs. 25,000
had been purchased on 1st January,1996 The other machinery had been held from
1.1.1994. The company had commenced business from 01.01.1994.
On 1.1.1998 the machinery purchased on 1.1.1996 was sold for Rs. 16,000/-
and a new machinery worth Rs. 23,000 was purchased and installed at a cost of Rs.
1,300.
The Company decided on 31.12.1998 to change the method of Depreciation from
Fixed instalment method to reducing balance method. The rate of depreciation being
10% p.a. under both methods.
Show the machinery account for the year 1998 together with relevant working
notes.

16. On 1.1.97 M/s Ltd. acquired a machine for Rs. 60,000/- The estimated useful life
of the machine was estimated to be 5 years. On 1st Jan 1999, the company revised its
expectation of the life of the asset which was expected to continue for another two
years.
Prepare machinery a/c for 4 years as per AS 6(Revised)

17. M/s LKJ Ltd. purchased a machine costing Rs. 2, 00,000/- on 1st Jan, 1997 with
expected life of 5 years. On 1st Jan, 1999, the company revalued the machine at Rs. 2,
80,000/- and revised its expected life to be two more years. Prepare Machinery A/c for
four years as per AS – 6 (REVISED)
OMTEX CLASSES

DEPRECIATION is derived from Latin word Depretium which means


reduction in the value fixed assets. In other words, Depreciation means reduction in
the value of fixed assets due to usage and passage of time.

• Cost of an asset: Cost of an asset includes purchase price of an assets and


whatever expenses is paid on the acquisition of fixed assets.
• Cost of an Assets: Purchase price of an assets + Incidentation
Charges + Installation charges
For e.g. Omtex company had purchased a computer for Rs. 20,000 by paying
frequent charges 2,000 Installation charges 3,000.
In the above case the Cost of the Assets will be Rs. 25,000/-
(i.e. 20,000+2,000+3,000)

• Scrap value: The amount which could be realized from the sale of
used/obsolete of assets it is called scrap value. Scrap value is also known
as residual value.
For e.g. Omtex company purchased an computer for Rs. 25,000/- used for 10
years and sold for Rs. 4,000/- This 4,000 is known as scrap value.

• Estimated life of an assets: Expectation life of an asset say 1year, 2years,


3years etc. is known as estimated life of an assets.
• Calculation of Depreciation:
Depreciation p.a. Cost of an Assets ( — ) Scrap value
Estimated Life of an Assets.

JOURNAL ENTRIES
1. When the assets are purchased
Assets A/c ………………………… Dr.
To cash / bank A/c

2. When the Depreciation is charged


Depreciation A/c ………………… Dr.
To assets A/c

3. When the depreciation is transferred to Profit/ Loss A/c.


Profit/ Loss A/c …………………… Dr.
To Depreciation A/c

4. When assets are sold


Cash/bank A/c …………………… Dr.
To assets A/c

5. When there is a profit on sales of assets


Assets A/c………………………… Dr.
OMTEX CLASSES
To profit/loss A/c

6. When there is a loss on sale of assets


Profit/loss A/c …………………… Dr.
To assets A/c

➢ What are the causes of depreciation?


I . Physical wear and tear: The most important fact that contributes to depreciation of
an asset is the physical wear and tear resulting from its use. A tangible asset physically
deteriorates by wear and tear caused from vibration, friction, movement, strain,
erosion etc.
II. Physical deterioration:- In case of a majority assets, the deterioration take place
with sheer passage of time. The assets are exposed to the elemental forces of nature
such as winds, weather. etc.
III. Expiry of legal rights:- Assets like patents, lease and license, depreciate with the
passage of time.
IV. Obsolescence: Depreciation may be caused on account of obsolescence. It may be
due to technological development in asset, technique of production or product.
V. Fall in value due to demand fluctuations: Some times, the demand for services
provided by the assets may fluctuate which causes a fall in the value of an assets.

➢ Fixed Instalment Method:Fixed instalment method is also known as a ‘straight


line’ method. Under this method a fixed percentage of the original cost of the
asset is charged as depreciation every year during the life of the assets.
Formula: Depreciation = Original cost — Residual /Scrap value
Number of Years of life of assets
Graphically,

Depreciation

No of years x

Under this method depreciation remains constant year after year


for example. The original cost is Rs. 10,000/- residual scrap value is Rs. 1,000/-
number of years of assets is 10 years.
Then, Depreciation = 10,000 – 1,000
10
= 9,000
10
= Rs. 900 per annum
Advantages of this method.
1. It is the simple method of charging depreciation.
2. The book value of an assets can be reduced to Zero or Scrap value
3. The provision for depreciation is spread equally over the estimated life of the
assets.
4. Suitable for costing purpose, as there is no variation in depreciation change
from year to year.
5. It matches cost and revenue.
• Disadvantages of this method.
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1. Provision of depreciation is equal for every year during the life of assets. However,
the expenditure on repairs and renewal goes on increase as the assets gets older,
resulting in
higher aggregate charge on account of depreciation and repairs on revenue. i.e. to
profit and loss A/c, in the later years of the life of the assets.
2. Under this method, interest lost on the money locked up in the assets is not taken
into consideration.
➢ Reducing Balance or Written down value method or Diminishing Balance
Method.
This method also known as reducing balance, written down value, diminishing
balance method. Under this method depreciation is calculated on the balance that
remains after deducting the depreciation for the previous years, which appears in the
accounts as the opening balance at the beginning of the years:-
For e.g. If the cost of the assets is Rs. 10,000/- and the depreciation is to be charged at
the rate of 10% on Rs. 10,000/- will be Rs. 1,000/- for the first year. Then, for the
second year depreciation at 10% on Rs. 9,000 will be Rs. 1,000/-
For the third year it would be, 10% but on the remaining asset value of Rs. 8,100 (i.e.)
the depreciation would be of Rs, 810/- and so on …
Graphically

y
Depreciation

No. of years x
Advantage:
1. The expenses for the use of the assets are scientifically provided.
2. These expenses include depreciation charge for repairs and renewals.
3. The depreciation charges may be higher but the repair and renewal charges
may be lower or the depreciation charges may be lower but the repair and
renewal charges may be higher, thus the profit and loss account is debited
more or less by equal amount each year in this method.
4. This method of depreciation is recognized under the companies act and
income tax act.
Disadvantage:
1. The assets value can never be reduced to Zero in the book.
2. Interest on capital invested in the assets is not considered.
3. If this depreciation is considered for the costing, the cost of production in the
earlier period will be more.
OMTEX CLASSES
STRAIGHT LINE METHOD WRITTEN DOWN VALUE
METHOD
AMOUNT OF DEPRECIATION
1. It remains the same every 1. It goes on reducing every
year. years.
CALCULATED
2. It is charged on original cost 2. It is charged on reducing
of the asset every year balance every year.
3. The amount of depreciation 3. The amount of depreciation
and maintenance increased in and maintenance is equal every
later years. year.
BOOK – VALUE
4. The book value of the assets The book value of the assets
can can never be brought to Zero.
be brought to Zero.
PROFITS
5. Profits are more in the earlier 5. Profits are realistic every
year. years.