Академический Документы
Профессиональный Документы
Культура Документы
DEPRECIATION
ACCOUNTING
Learning Objectives
After studying this chapter, you will be able to :
1. INTRODUCTION
Fixed assets like plant and machinery etc. are used in the business for the purpose of production of
goods or for providing useful services in the course of production. These fixed assets are utilized
during operations of a business for a number of successive accounting periods. Value of such
fixed assets decreases with passage of time and its utilization i.e. wear and tear. Value of portion
of fixed asset utilized for generating revenue must be recovered during a particular accounting
year to ascertain true income. This portion of cost of fixed asset allocated to a particular accounting
year is called depreciation.
1.1 CONCEPT OF DEPRECIATION
Depreciation has been defined as the diminution in the utility or value of an asset, due to natural
wear and tear, exhaustion of the subject-matter, effluxion of time accident, obsolescence or similar
causes. The words accident, obsolescence and the phrase effluxion of time included in the
definition, signify that when an asset held by a business cannot be employed for even one of the
purposes for which it was acquired due to some damage suffered, the assets having become out
of date or due to no occasion having arisen for it to be used, the loss caused to the business will
be depreciation. Depreciation caused by any one of the last mentioned factors often is described
as external depreciation, to distinguish it from the natural wear and tear of assets which is known
as internal depreciation.
is a measure of wearing out, consumption or other loss of value of a depreciable
Depreciation asset arising from use, effluxion of time or obsolescence through technology
and market changes. Depreciation is allocated so as to charge a fair proportion
of the depreciable amount in each accounting period during the expected useful life of the asset.
Depreciation includes amortisation of asset whose useful life is predetermined.
are those which (i) are expected to be used during more than one accounting
Depreciable
period; and (ii) have a limited useful life; and (iii) are held by an enterprise for
Assets
use in the production or supply of goods and services for rental to others or
for administrative purposes and not for the purpose of sale in the ordinary
course of business.
Objectives of providing
depreciation
(residual)
value normally regarded as nil. On the other hand, if the residual
value is likely to be significant, it is estimated at the time
of acquisition/installation, or at the time of subsequent
revaluation of asset.
Depreciable amount of a depreciable asset is its historical cost,
Depreciable or other amount substituted for historical cost in the financial
amount statements, less the estimated residual value.
As per Schedule II under the Companies Act, 2013, Depreciation is the systematic allocation of the
depreciable amount of an asset over its useful life. The depreciable amount of an asset is the cost
of an asset or other amount substituted for cost, less its residual value. The useful life of an asset
is the period over which an asset is expected to be available for use by an entity, or the number
of production or similar units exprected to be obtained from the asset by the entity.
The underlying assumption of this method is that the particular asset generates equal utility
during its lifetime. But this cannot be true under all circumstances. The expenditure incurred on
repairs and maintenance will be low in earlier years, whereas the same will be high as the asset
becomes old. Apart from this the asset may also have varying capacities over the years, indicating
logic for unequal depreciation provision. However, many assets have insignificant repairs and
maintenance expenditures for which straight line method can be applied.
3.2 REDUCING BALANCE METHOD
Under this system, a fixed percentage of the diminishing value of the asset is written off each year
so as to reduce the asset to its break - up value at the end of its life, repairs and small renewals
being charged to revenue. This method is commonly used for plant, fixtures, etc. Under this
method, the annual charge for depreciation decreases from year to year, so that the earlier years
suffer to the benefit of the later years. Also, under this method, the value of asset can never be
completely extinguished, which happens in the earlier explained Straight Line Method. However,
it is very simple to operate. The other advantage of this method is that the total charge to revenue
is uniform when the depreciation is high, repairs are negligible; and as the repairs increase, the
burden of depreciation gets lesser and lesser. On the other hand, under the Straight Line Method,
the charge for depreciation is constant, while repairs tend to increase with the life of the asset.
Among the disadvantages of this method is the danger that too low a percentage may be adopted
as depreciation with the result that over the life of the asset full depreciation may not be provided;
also if assets are grouped in such a way that individual assets are difficult to identify, the residue
of an asset may lie in the asset account even after the asset has been scrapped. The last mentioned
difficulty could be, however, over come if a Plant register is maintained.
The rate of depreciation under this method may be determined by the following formula:
Dr. Cr.
2014 ` 2014 `
July 1 To Bank A/c 14,000 Dec. 31 By Depreciation A/c
July 1 To Bank A/c - 10% on ` 15,000 for 750
Installation Expenses 1,000 6 months
Dec. 31 By Balance c/d 14,250
15,000 15,000
2015 2015
Jan. 1 To Balance b/d 14,250 Dec. 31 By Depreciation A/c
10% on ` 15,000 1,500
Dec. 31 By Balance c/d 12,750
14,250 14,250
Depreciation Account
2014 ` 2014 `
Dec. 31 To Machinery A/c 750 Dec. 31 By Profit & Loss A/c 750
2015 2015
Dec. 31 To Machinery A/c 1,500 Dec. 31 By Profit & Loss A/c 1,500
Illustration 2
Jain Bros. acquired a machine on 1st July, 2014 at a cost of ` 14,000 and spent ` 1,000 on its
installation. The firm writes off depreciation at 10% p.a. every year. The books are closed on 31st
December every year. Show the Machinery Account on diminishing balance method for the year
2014 and 2015.
Solution
As per Reducing Balance Method
Machinery Account
2014 ` 2014 `
July 1 To Bank A/c 14,000 Dec. 31 By Depreciation A/c 750
To Bank A/c 1,000 (` 15,000 x 10% x 6/12)
Dec. 31 By Balance c/d 14,250
15,000 15,000
2015 2015
Jan. 1 To Balance b/d 14,250 Dec. 31 By Depreciation A/c 1,425
(` 14,250 x 10%)
Dec. 31 By Balance c/d 12,825
14,250 14,250
3.3 SUM OF YEARS OF DIGITS METHOD
It is variation of the Reducing Balance Method. In this case, the annual depreciation is calculated
by multiplying the original cost of the asset less its estimated scrap value by the fraction represented
by :
The number of years (including the present year) of remaining life of the asset
Total of all digits of the life of the asset (in years)
Suppose the estimated life of an asset is 10 years; the total of all the digits from 1 to 10 is 55 i.e.,10
+ 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1, or by the formula:
=
= 55
The depreciation to be written off in the first year will be 10/55 of the cost of the asset less
estimated scrap value; and the depreciation for the second year will be 9/55 of the cost of asset
less estimated scrap value and so on.
The method is not yet in vogue in india; and its advantages are the same as those of the Reducing
Balance Method.
Illustration 3
M/s Raj & Co. purchased a machine for ` 1,00,000. Estimated useful life and scrap value were
10 years and ` 12,000 respectively. The machine was put to use on 1.1.2010. Show Machinery
Account and Depreciation Account in their books for 2015 by using sum of years digits method.
Dr. Cr.
2015 ` 2015 `
Jan. 1 To Balance b/d (W.N.2) 36,000 Dec. 31 By Depreciation A/c (W.N.3) 8,000
Dec. 31 By Balance c/d 28,000
36,000 36,000
2016
Jan.1 To Balance b/d 28,000
Depreciation Account
2015 ` 2015 `
Dec. 31 To Machinery A/c 8,000 Dec. 31 By Profit and Loss A/c 8,000
8,000 8,000
Working Notes :
(1) Total of sum of digit of depreciation for 2010-2014
= (` 1,00,000 - ` 12,000) 10 + 9 + 8 + 7 + 6
10(10 + 1)
2
= ` 88,000 = ` 64,000
(2) Written down value as on 1-1-2015
` 1,00,000 - ` 64,000 = ` 36,000
(3) Depreciation for 2015
(` 1,00,000 - ` 12,000) = ` 8,000.
asset. Though the amount written off annually is constant, the interest in the earlier years being
greater, only small amount of the capital outlay is written off. This proportion is reversed with
the passage of time. This method is eminently suitable for writing off the amounts paid for long
leases which involve a considerable capital outlay. It is not practicable to adopt this method for
writing off depreciation of plant and machinery on account of frequent changes in the value of
such assets which would necessitate the recalculation of the amount of depreciation to be written
off annually.
Relevant Journal entries are:
(1) For charging interest on asset account
Asset Account Dr.
To Interest Account
(2) For charging depreciation on asset
Depreciation Account Dr.
To Asset Account
(3) For transferring depreciation to Profit and Loss Account
Profit and Loss Account Dr.
To Depreciation Account
(4) For transferring interest to Profit and Loss Account
Interest Account Dr.
To Profit and Loss Account
Illustration 4
A lease is purchased on 1st January, 2012 for 4 years at a cost of ` 20,000. It is proposed to
depreciate the lease by the annuity method charging 5 percent interest. A reference to the annuity
table shows that to depreciate ` 1 by annuity method over 4 years charging 5% interest, one must
write off a sum of ` 0.282012 [To write off ` 20,000 one has to write off every year ` 5,640.24 i.e.
0.282012 20,000].
Show the Lease Account for four years and also the relevant entries in the profit and loss account.
Dr. Cr.
2012 ` 2012 `
Jan. 1 To Bank A/c 20,000.00 Dec. 31 By Depreciation A/c 5,640.24
Dec. 31 To Interest A/c By Balance c/d 15,359.76
(5% on ` 20,000) 1,000.00
21,000.00 21,000.00
2013 2013
Jan. 1 To Balance b/d 15,359.76 Dec.31 By Depreciation A/c 5,640.24
Dec. 31 To Interest A/c By Balance c/d 10,487.51
(5% on ` 15,359.76) 767.99
16,127.75 16,127.75
2014 2014
Jan. 1 To Balance b/d 10,487.51 Dec. 31 By Depreciation A/c 5,640.24
Dec. 31 To Interest A/c 524.38 Dec. 31 By Balance c/d 5,371.65
11,011.89 11,011.89
2015 2015
Jan. 1 To Balance b/d 5,371.65 Dec. 31 By Depreciation A/c 5,640.24
Dec. 31 To Interest A/c 268.59
5,640.24 5,640.24
2012 ` 2012 `
Dec. 31 To Depreciation A/c 5,640.24 Dec. 31 By Interest A/c 1,000.00
2013 2013
Dec. 31 To Depreciation A/c 5,640.24 Dec. 31 By Interest A/c 767.99
2014 2014
Dec. 31 To Depreciation A/c 5,640.24 Dec. 31 By Interest A/c 524.38
2015 2015
Dec. 31 To Depreciation A/c 5,640.24 Dec. 31 By Interest A/c 268.59
FUNDAMENTALS OF ACCOUNTING 5.11
2014 13th Oct.: Investments which originally costed ` 1,100 were sold for ` 1,200 and the proceeds
of sale were re-invested.
2015 31st March: A contribution from profits of ` 3,200 was made; interest on investments of `
160 was received and these amounts were reinvested.
2015 9th August: Investments which originally costed ` 2,100 were sold at a profit of ` 200 and
proceeds of sale were re-invested.
2016 31st March: Interest on investments ` 480 was received which was not invested. All existing
investments were sold for ` 6,600. A contribution from profit of an amount required to make up
the sinking fund to ` 10,000 was made and this amount was not invested.
You are required to prepare Sinking Fund and Sinking Fund Investment Account for the years
2013-14, 2014-15, 2015-16.
Solution
Sinking Fund Account
2014 ` 2014 `
March 31 To Balance c/d 3,200 March 31 By Depreciation A/c 3,200
3,200 3,200
2015 2015
March 31 To Balance c/d 6,660 April 1 By Balance b/d 3,200
Oct. 13 By S.F. Investment A/c 100
March 31 By Interest on
S.F.Investment A/c 160
By Depreciation A/c 3,200
6,660 6,660
2015 2015
March 31 To S.F. Investment A/c 260 April 1 By Balance b/d 6,660
To Lease A/c 10,000 August 9 By S.F. Investment A/c 200
Dec. 31 March 31 By Interest on S.F. 480
Investment A/c
By Depreciation A/c 2,920
(Balancing Figure)
10,260 10,260
Illustration 6
On the basis of the data given in the illustration 5, prepare Lease Account and Depreciation
Account for the years 1st April, 2013 to 31st March, 2016.
Solution
Lease Account
2013 ` 2014 `
April 1 To Bank A/c 10,000 March 31 By Balance c/d 10,000
10,000 10,000
2014 2015
April 1 To Balance b/d 10,000 March 31 By Balance c/d 10,000
10,000 10,000
2015 2016
April 1 To Balance b/d 10,000 March 31 By Sinking Fund A/c 10,000
10,000 10,000
Depreciation Account
2014 ` 2014 `
March 31 To Sinking Fund A/c 3,200 March 31 By Profit & Loss A/c 3,200
3,200 3,200
2015 2015
March 31 To Sinking Fund A/c 3,200 March 31 By Profit & Loss A/c 3,200
3,200 3,200
2016 2016
March 31 To Sinking Fund A/c 2,920 March 31 By Profit & Loss A/c 2,920
2,920 2,920
Solution
Statement showing Depreciation under Production Units Method
Year Annual Depreciation
10,000
8-10 1,50,000 (` 2,00,000 - ` 20,000) = ` 12,000
Dr. Cr.
2013 ` 2013 `
Jan. To Bank A/c 1,00,00,000 Dec. 31 By Depreciation A/c 1,00,000
[(2,000/2,00,000)
` 1,00,00,000]
Dec. 31 By Balance c/d 99,00,000
1,00,00,000 1,00,00,000
2014 2014
Jan. 1 To Balance b/d 99,00,000 Dec. 31 By Depreciation A/c 5,00,000
Dec. 31 By Balance c/d 94,00,000
99,00,000 99,00,000
2015 2015
Jan. 1 To Balance b/d 94,00,000 Dec. 31 By Depreciation A/c 7,50,000
Dec. 31 By Balance c/d 86,50,00
94,00,000 94,00,000
Dr. Cr.
2013 ` 2013 `
Dec. 31 To Quarry lease A/c 1,00,000 Dec. 31 By Profit & Loss A/c 1,00,000
1,00,000 1,00,000
2014 2014
Dec. 31 To Quarry lease A/c 5,00,000 Dec. 31 By Profit & Loss A/c 5,00,000
5,00,000 5,00,000
2015 2015
Dec. 31 To Quarry lease A/c 7,50,000 Dec. 31 By Profit & Loss A/c 7,50,000
7,50,000 7,50,000
Illustration 10
A firm purchased on 1st January, 2014 certain machinery for ` 58,200 and spent ` 1,800 on
its erection. On July 1, 2014 another machinery for ` 20,000 was acquired. On 1st July, 2015
the machinery purchased on 1st January, 2014 having become obsolete was auctioned for
` 38,600 and on the same date fresh machinery was purchased at a cost of ` 40,000.
Depreciation was provided for annually on 31st December at the rate of 10 per cent p.a. on written
down value. Prepare machinery account.
Solution
Machinery Account
Dr. Cr.
2014 ` 2014 `
Jan. 1 To Bank A/c 58,200 Dec. 31 By Depreciation A/c 7,000
Jan. 1 To Bank A/c
erection charges 1,800 By Balance c/d 73,000
July 1 To Bank A/c 20,000
80,000 80,000
2015 2015
Jan. 1 To Balance b/d 73,000 July 1 By Depreciation on
sold machine 2,700
July 1 To Bank A/c 40,000 By Bank A/c 38,600
By Profit and Loss A/c 12,700
Dec. 31 By Depreciation A/c 3,900
By Balance c/d 55,100
1,13,000 1,13,000
Working Note:
Book Value of Machines
Machine Machine Machine
I II III
` ` `
Cost 60,000 20,000 40,000
Depreciation for 2014 6,000 1,000
Written down value 54,000 19,000
Depreciation for 2015 2,700 1,900 2,000
Written down value 51,300 17,100 38,000
Sale Proceeds 38,600
Loss on Sale 12,700
Depreciation is at the rate of 10% per annum on cost. It is the Companys policy to assume that
all purchases, sales or disposal of plant occurred on 30th June in the relevant year for the purpose
of calculating depreciation, irrespective of the precise date on which these events occurred.
During 2015 the following transactions took place:
1. Purchase of plant and machinery amounted to ` 1,50,000
2. Plant that had been bought in 2004 for ` 17,000 was scrapped.
3. Plant that had been bought in 2005 for ` 9,000 was sold for 500.
4. Plant that had been bought in 2006 for ` 24,000 was sold for ` 1,500.
You are required to:
Calculate the provision for depreciation of plant and machinery for the year ended 31st December,
2015. In calculating this provision you should bear in mind that it is the companys policy to show
any profit or loss on the sale or disposal of plant as a completely separate item in the Profit and
Loss Account.
Solution
Calculation of provision for depreciation of plant and machinery for the year ended 31st
December, 2015.
Plant purchased in: ` `
1998 nil
2004 nil
2005 5,000
2006 1/2 year at 10% on ` 24,000 1,200
1 year at 10% on ` 46,000 4,600 5,800
2013 10% on ` 50,000 5,000
2014 10% on ` 30,000 3,000
2015 1/2 year at 10% on ` 1,50,000 7,500
26,300
Illustration 12
Prepare the following ledger accounts during 2015 from the information given in
illustration 11 :
(i) plant and machinery at cost ;
(ii) depreciation provision;
(iii) sales or disposal of plant and machinery.
Solution
(i) Plant and Machinery Account (for 2015) at Cost
` `
To Balance b/d 3,00,000 By Disposals account:
To Purchases A/c 1,50,000 Scrapped 17,000
Sold 33,000
By Balance c/d 4,00,000
4,50,000 4,50,000
` `
To Disposal Account : By Balance b/d 2,13,500
Scrapped - 2004 assets 17,000 By Profit and Loss Account 26,300
Sold - 2005 assets 9,000
Sold - 2006 assets 21,600 47,600
To Balance c/d 1,92,200
2,39,800 2,39,800
Illustration 13
The Machinery Account of a Factory showed a balance of ` 1,90,000 on 1st January, 2015. Its
accounts were made up on 31st December each year and depreciation is written off at 10% p.a.
under the Diminishing Balance Method.
On 1st June 2015, a new machinery was acquired at a cost of ` 28,000 and installation charges
incurred in erecting the machine works out to ` 892 on the same date. On 1st June, 2015 a machine
which had cost ` 4,374 on 1st January 2013 was sold for ` 750. Another machine which had cost
` 437 on 1st January, 2014 was scrapped on the same date and it realised nothing.
Write a plant and machinery account for the year 2015, allowing the same rate of depreciation as
in the past calculating depreciation to the nearest multiple of a Rupee.
Solution
Plant and Machinery Account
Dr. Cr.
2015 ` 2015 `
Jan. 1 To Balance b/d 1,90,000 June 1 By Bank (Sales) 750
June. 1 To Bank (28,000 + 892) 28,892 By Depreciation (on sold 148
machine)
By Loss on sale 2,645
By Loss on scrapping the 377
machine
By D e p r e c i a t i o n ( o n 16
scrapped machinery)
By Depreciation (Note iii) 20,291
By Balance c/d 1,94,665
2,18,892 2,18,892
Working Note :
(i) Calculation of loss on sale of machine on 1-6-2015
`
Cost on 1-1-2013 4,374
Less : Depreciation @ 10% on ` 4,374 (437)
W.D.V. on 31-12-2013 3,937
Less : Depreciation @ 10% on ` 3,937 (394)
W.D.V. on 31-12-2014 3,543
Less : Depreciation @ 10% on ` 3,543 for 5 months (148)
3,395
Less : Sale proceeds on 1-6-2015 (750)
Loss 2,645
(ii) Calculation of loss on scrapped machine
`
Cost on 1-1-2014 437
Less : Depreciation @ 10% on ` 437 (44)
W.D.V. on 1-1-2015 393
Less : Depreciation @ 10% on ` 393 for 5 months (16)
Loss 377
a=1-
After applying the log and antilog table, the rate of depreciation would be derived as follows:
a = 1-(5,000/1,05,000)1/10
a = 1-(1/21)1/10
Let (1/21)1/10 =a
Taking log both sides
Log a = 1/10(log1-log21)
= 1/10(0-1.3222)
= -0.13222
Adding and Subtracting 1 we get
bar 1.86778
Taking antilog both sides
a= antilog(bar 1.86778)
= 0.73753
Thus,
1 - 0.73753
= 0.26247 or 26.247%
Depreciation already charged for the first 2 years as per straight line method is ` 20,000.
Retrospective computation of depreciation as per WDV method:
Cost of Machine ` 1,05,000
Less : Depreciation for the 1st year @ 26.247% ` 27,559
WDV at the beginning of 2nd year ` 77,441
Less : Depreciation for the 2nd year @ 26.247% 20,326
WDV at the beginning of 3rd year ` 57,115
Less : Depreciation for the 3rd year @ 26.247% 14,991
42,124
WDV : Depreciation for first two years ` 47,885
Less : Depreciation already charged as per straight line method `
Rs. 1, 05, 000 `
Rs. 5, 000 x 2 (` 20,000)
10
Shortfall ` 27,885
Therefore in the profit and loss account of the 3rd year, the short depreciation due to change in
the method of depreciation of ` 27,885 should be debited. In addition, depreciation as per written
down value method for 3rd year of ` 14,991, should also be debited.
Illustration 14
A firm purchased on 1st January, 2013 certain machinery for ` 52,380 and spent ` 1,620 on its
erection. On January 1, 2013 another machinery for ` 19,000 was acquired. On 1st July, 2014 the
machinery purchased on 1st Januray, 2013 having become obsolete was auctioned for ` 28,600
and on the same date fresh machinery was purchased at a cost of ` 40,000.
Depreciation was provided annually on 31st December at the rate of 10 per cent on written down
value. In 2015, however, the firm changed this method of providing depreciation and adopted
the method of providing 5 per cent per annum depreciation on the original cost of the machinery
with retrospective effect.
2013 ` 2013 `
Jan. 1 To Bank 52,380 Dec. 31 By Depreciation A/c 7,300
Jan. 1 To Bank-erection charges 1,620 By Balance c/d 65,700
Jan. 1 To Bank 19,000
73,000 73,000
2014 2014
Jan. 1 To Balance b/d 65,700 July 1 By Depreciation 2,430
July 1 To Bank 40,000 By Bank 28,600
By Profit and Loss A/c 17,570
Dec. 31 By Depreciation A/c 3,710
By Balance c/d 53,390
1,05,700 1,05,700
2015 2015
Jan. 1 To Balance b/d 53,390 Dec. 31 By Depreciation A/c 2,950
To Profit and Loss A/c By Balance c/d 53,150
(Excess Dep. written back)
2,710
56,100 56,100
Working Notes :
(1) Book Value of Machines:
Machine Machine Machine
I II III
` ` `
Cost 54,000 19,000 40,000
Depreciation for 2013 5,400 1,900
Written down value 48,600 17,100
Depreciation for 2014 2,430 1,710 2,000
Written down value 46,170 15,390 38,000
Sale Proceeds in 2015 28,600
Loss on Sale 17,570
(2) Written down value on the basis of 5% depreciation on straight line basis as at 31st Dec.,
2014.
Machine Machine
II III
` `
Cost 19,000 40,000
Less : Depreciation for 2 years 1,900
Depreciation for 1/2 year 1,000
17,100 39,000
Total ` 56,100
(3) The book value appearing in the books is ` 53,390; ` 2,710 has to be written back to make
this figure ` 56,100.
Note : The rate of 10% is assumed to be per annum.
Illustration 15
Messers Mill and Wright commenced business on 1st January 2011, when they purchased plant
and equipment for ` 7,00,000. They adopted a policy of charging depreciation at 15% per annum
on diminishing balance basis and Over the years, their purchases of plant have been:
Date Amount
`
1-1-2012 1,50,000
1-1-2015 2,00,000
On 1-1-2015 it was decided to change the method and rate of depreciation to 10% on straight line
basis with retrospective effect from 1-1-2011 the adjustment being made in the books of account.
Calculate the difference in depreciation to be adjusted in the Plant and Equipment being made
in the accounts for the year ending 31st December, 2015.
Dr. Cr.
` `
1.4.2015 To Balance b/d 20,00,000 31.3.2016 By Balance c/d 21,26,492
To Revaluation
Reserve 1,26,492
21,26,492 21,26,492
Provision for Depreciation Account
Dr. Cr.
` `
31.3.2016 To Balance c/d 14,56,480 1.4.2015 By Balance b/d 13,67,538
31.3.2016 By Profit and Loss 88,942
A/c
14,56,480 14,56,480
Working Notes:
(1) In the year 2010-11 : Calculation of rate of depreciation as per WDV method
= 1 10 2,00,000 100
20,00,000
After applying the log and antilog table, the rate of depreciation would be derived as follows:
= [1 -(1/10 log 20 - 1/10 log 200)] x 100
= [1 -(1/10 x 1.3010 - 1/10 x 2.3010)] x 100
(3) *In the year 2015-16 : Calculation of rate of depreciation as per WDV method
After applying the log and antilog table, the rate of Deprication would be derived as follows:
1 1
= [1 - (
8 log 2,80,000 - 8 log 7,58,812)] 100
#
1 # 1 #
= [1 - ( 5.4772 - 5.8802)] # 100
8 8
= [1 - (0.6809 - 0.7350)] # 100
= [1 - (0.0541)] # 100
= [1 - (Antilog - 0.0541 + 1 -1)] # 100
= [1 - (Antilog bar - 1.959)] # 100
= [1 -0.8838] # 100
= 11.62%
* The rate of depreciation has been calculated by applying log and antilog table.
Dr. Cr.
` `
31.3.2015 To Repairs A/c 75,000 1.4.2014 By Balance b/d 1,50,000
31.3.2015 To Balance c/d 1,15,000 (Balancing figure)
31.3.2015 By Profit and Loss A/c 40,000
1,90,000 1,90,000
31.3.2016 To Repairs A/c 32,000 1.4.2015 By Balance b/d 1,15,000
31.3.2016 To Balance c/d 1,23,000 31.3.2016 By Profit and Loss A/c 40,000
1,55,000 1,55,000
1.4.2016 By Balance b/d 1,23,000
7. Original cost = ` 1,26,000. Salvage value = 6,000. Depreciation for 2nd year by Units of
Production Method, if units produced in 2nd year was 5,000 and total estimated production
50,000.
(a) ` 10,800 (b) ` 11,340 (c) ` 12,600 (d) ` 12,000
8. The number of production of similar units expected to be obtained from the use of an asset
by an enterprise is called as
(a) Unit life (b) Useful life
(c) Production life (d) Expected life
9. Which of the following is not true with regard to fixed assets?
(a) They are acquired for using them in the conduct of business operations
(b) They are not meant for resale to earn profit
(c) They can easily be converted into cash
(d) Depreciation at specified rates is to be charged on most of the fixed assets
10. Original cost = ` 1,26,000. Salvage value = 6,000. Useful Life = 6 years. Annual depreciation
under SLM =
(a) ` 21,000 (b) ` 20,000 (c) ` 15,000 (d) ` 14,000
11. Original cost = ` 1,26,000. Salvage value = 6,000. Depreciation for 2nd year @ 10% p.a. under
WDV method =
(a) ` 10,800 (b) ` 11,340 (c) ` 15,000 (d) ` 14,000
12. Which of the following expenses is not included in the acquisition cost of a plant and
equipment?
(a) Cost of site preparation (b) Delivery and handling charges
(c) Installation costs
(d) Financing costs incurred subsequent to the period after plant and equipment is put to
use.
13. For charging depreciation, on which of the following assets, the depletion method is adopted?
(a) Plant & machinery (b) Land & building
(c) Goodwill (d) Wasting assets like mines and quarries
14. If a concern proposes to discontinue its business from March 2015 and decides to dispose
of all its assets within a period of 4 months, the Balance Sheet as on March 31, 2015 should
indicate the assets at their
(a) Historical cost (b) Net realizable value
(c) Cost less depreciation (d) Cost price or market value, whichever is lower
23. Depreciation under new method for 2013-14 and 2014-15 = _______.
(a) ` 1,33,400 (b) ` 1,26,000 (c) ` 1,40,000 (d) ` 1,55,556
24. Further depreciation to be provided = ______.
(a) ` 5,670 (b) ` 6,300 (c) ` 7,000 (d) ` 7,778
25. Depreciation for the year 2015-16 = _________.
(a) ` 3,300 (b) ` 7,000 (c) ` 10,300 (d) ` 73,300
26. The balance outstanding to the debit of machinery account as on March 31, 2016 after effecting
the above changes was
(a) ` 5,45,700 (b) ` 5,52,700 (c) ` 5,46,000 (d) ` 5,49,400
On the basis of the information given below answer questions 27 & 28.
The balance in the accumulated provision for depreciation account of a company as at the
beginning of the year 2015-2016 was ` 2,00,000 when the original cost of the assets amounted to
` 10,00,000. The company charges full 10% depreciation on a straight line basis for all the assets.
One such asset costing ` 5,00,000 with accumulated depreciation as at the beginning of the year
of ` 1,00,000 was disposed of at the begining of the year.
27. Depreciation for the current year is
(a) ` 40,000 (b) ` 50,000 (c) ` 60,000 (d) ` 1,00,000
28. The balance of the accumulated depreciation account at the end of the year considering
the current years depreciation charge would be
(a) ` 2,20,000 (b) ` 1,50,000 (c) ` 1,20,000 (d) ` 2,50,000
On the basis of the information given below answer questions 29 to 34.
B Limited has been charging depreciation on the straight line method. It charges a full year
depreciation even if the machinery is utilized only for part of the year. An equipment which was
purchased for ` 3,50,000 now stands at ` 2,97,500 after depreciating at the rate of 5% on a straight
line basis. Now the company decides to change the method of depreciation with retrospective
effect. The applicable reducing balance rate for this machinery would be 8% p.a. Assuming that
before the effect of this change could be accounted, depreciation for the current year is already
charged based on straight line method and is reflected in the depreciated value of ` 2,97,500.
29. Straight line depreciation per annum is
(a) ` 15,000 (b) ` 17,500 (c) ` 35,000 (d) ` 52,500
30. Number of years for which depreciation has been charged on this basis is
(a) 2 years (b) 3 years (c) 4 years (d) 5 years
31. If 8% depreciation was charged by the reducing balance method, WDV at the end of
1st year was
(a) ` 2,72,541 (b) ` 2,96,240 (c) ` 3,22,000 (d) ` 3,60,000
38. The depreciation expenditure for the 1st year under units-of-production method will be
(a) ` 6,250 (b) ` 12,500 (c) ` 15,000 (d) ` 25,000
39. The depreciation expenditure for the 2nd year under units-of-production method will be
(a) ` 6,250 (b) ` 12,500 (c) ` 15,000 (d) ` 25,000
40. The depreciation expenditure for the 3rd year under units-of-production method will be
(a) ` 6,250 (b) ` 12,500 (c) ` 15,000 (d) ` 25,000
41. The depreciation expenditure for the 4th year under units-of-production method will be
(a) ` 6,250 (b) ` 12,500 (c) ` 15,000 (d) ` 25,000
42. The depreciation expenditure for the 5th year under units-of-production method will be
(a) ` 6,250 (b) ` 12,500 (c) ` 15,000 (d) ` 31,250.
On the basis of the information given below answer questions 43 to 47.
Consider the following information:
I. Rate of depreciation under the written down method = 20%.
II. Original cost of the asset = ` 1,00,000.
III. Residual value of the asset at the end of useful life = ` 40,960.
43. The estimated useful life of the asset is
(a) 4 years (b) 5 years (c) 6 years (d) 7 years
44. Depreciation for 1st year =
(a) ` 20,000 (b) ` 16,000 (c) ` 12,800 (d) ` 10,240
45. Depreciation for 2nd year =
(a) ` 20,000 (b) ` 16,000 (c) ` 12,800 (d) ` 10,240
46. Depreciation for 3rd year =
(a) ` 20,000 (b) ` 16,000 (c) ` 12,800 (d) ` 10,240
47. Depreciation for 4th year =
(a) ` 20,000 (b) ` 16,000 (c) ` 12,800 (d) ` 10,240
On the basis of the information given below answer questions 48 and 49.
On October 1, 2012 two machines costing ` 20,000 and ` 15,000 respectively, were purchased.
On March 31, 2016, both the machines had to be discarded because of damage and had to be
replaced by two machines costing ` 25,000 and ` 20,000 respectively.
One of the discarded machine was sold for ` 10,000 and against the other it was expected that `
5,000 would be realized. The firm provides depreciation @15% on written down value method.
ANSWERS
1. (d) 2. (d) 3. (c) 4. (d) 5. (c)
6. (b) 7. (d) 8. (b) 9. (c) 10. (b)
11. (b) 12. (d) 13. (d) 14. (b) 15. (c)
16. (a) 17. (a) 18. (b) 19. (c) 20. (c)
21. (c) 22. (c) 23. (c) 24. (c) 25. (d)
26. (b) 27. (b) 28. (b) 29. (b) 30. (b)
31. (c) 32. (b) 33. (a) 34. (a) 35. (a)
36. (a) 37. (a) 38. (a) 39. (b) 40. (c)
41. (d) 42. (d) 43. (a) 44. (a) 45. (b)
46. (c) 47. (d) 48. (c) 49. (b) 50 (d)
51. (c) 52. (b) 53. (d) 54. (d) 55. (d)