Depreciation

 Question 1.
Meaning of depreciation.
Answer:
Meaning of depreciation:
An expenditure which results into enduring benefit (long-term benefit) are treated as capital expenditure/fixed assets. Fixed assets are those assets which are held for use in the business and not for sale or consumption in the course of production.

Fixed assets which have a limited useful life are known as depreciable assets like, building, plant and machinery, etc. land is a non-depreciable asset. Revenue expenses are charged to the years P&L a/c similarly depreciable fixed assets should be charged over (written off) over its useful life.

This process of systematically allocating depreciable amount (cost less estimated scrap value) to the P&L accounts over its useful life is known as depreciation accounting. Amortization of assets which has specific life like patents etc. is also included in it.
1. Depreciation is the reduction in the value of fixed assets due to:

• its use,
• passage of time and
• obsolescence.

2. Depreciation is the apportionment of cost of asset net of estimated scrap value over its estimated useful life.

Question 2.
Sum of Years of Digits Method.
Answer:
Sum of Years of Digits Method:
In this method the depreciation is calculated in the ratio of the remaining life of the asset in the beginning of that year to the sum of digits of the life remaining for all the year.

Depreciation of the year =  dep value * no. of years ( including the present year )  of remaining life of the asset 

                                                                                   total off all digits  of the life of the asset( in year)

Question 3.
Depletion method
Answer:
Depletion method:

• This method is followed in case of exhaustive (wasting) assets example mines.
• For charging depreciation on such item the life of the Asset (lease period) is not very important because it can be used (i.e, Mineral can be extracted) only till it contains minerals.
• As soon as the mineral is exhausted the mine becomes useless.
• Therefore depreciation is calculated in proportion of the mineral extracted in a particular year to the total extractable mineral contained in it.
• Depreciation (per -ton, etc.  )     =                            cost of asset           
•                                                                         extractable quantity  of  Mineral          

Question 4.
On 1.1.03 machinery was purchased for ₹ 80,000. On 1.7.04 addition were made to the amount of ₹ 40,000. On 31.3.05 machine purchased on 1.7.04 costing ₹ 12,000 was sold for ₹ 11,000 & on 30.6.05 machinery purchased on 1.1.03 costing ₹ 32,000 was sold for ₹ 26,700. On 1.10.05 addition were made to the amount of ₹ 20,000. Show Machinery a/c & Depreciation a/c for 3 years 2003, 04, 05. Depreciate Machinery at 10% p.a. by W.D.V. method.
Solution:
Machinery A/c (W.D.V. 10%)
Depreciation a/c

Date           particulars                             amt.      Date        Particulars                     amt.

31.12.03        to machinery a/c                8000     31.12.03     by P & L a/c                             8000

                                                                     8000                                                                          8000

31.12.04        to machinery A/c               9200       31.12.04     by P & L  a/c                          9200

                                                                      9200                                                                          9200

31.3.05           to  machinery a/c                  285        31.12.05      by P&L a/c                            8629

30.6.05            to machinery a/c              1296

31.12.05            to machinery a/c              7048

                                                                        8629                                                                             8629

Working notes

 1 ) sold  on 31.3.2005                       2] sold on 30.6 2005              3 depreciation on 31. 12.2005

1.7.2004    cost      12000                1.1.03       cost       32000           balance of old machine

31.2004     dep         600                 31.12.03    dep         3200           on 1.1.05                1,02,800

01.01.05    balance  11400               1.01.04     bal         28800           [ – ]sold                    11,400

31.3.05       dep          285                 31.12.04    dep        2880            [-] sold                      25,920

31.3.05    balance     11,115                1.1.05      balance  25920           balance                   65480

               sold for       11000               30.6.05   dep            1296           dep @10%                    6548

                loss                115                                 bal              24624        on new machine  

                                                                            sold for     26700          20000*10 divided by

                                                                                                                   100*3  divided by 12       500

                                                                             profit          2076                                                      7048

Depreciation : Calculation by SLM and Accounting by credit to Asset a/c.

Question 5.
On 1.1.03 machinery was purchased for ₹ 80,000. On 1.7.04 addition were made to the amount of ₹ 40,000. On 31.3.05 machine purchased on 1.7.04 costing ₹ 12,000 was sold for ₹ 11,000 & on 30.6.05 machinery purchased on 1.1.03 costing ₹ 32,000 was sold for ₹ 26,700. On 1.10.05 addition were made to the amount of ₹ 20,000. Show Machinery a/c & Depreciation a/c for 3 years 2003, 04, 05. Depreciate Machinery at 10% p.a. by S.L.M.

Question 6. On 1.1.03 machinery was purchased for ₹ 80,000. On 1.7.04 addition were made to the amount of ₹ 40,000. On 31.3.05 machine purchased on 1.7.04 costing ₹ 12,000 was sold for t 11,000 & on 30.6.05 machinery purchased on 1.1.03 costing t 32,000 was sold for ₹ 26,700. On 1.10.05 addition were made to the amount of ₹ 20,000. Show Machinery a/c, Depreciation provision a/c and Asset disposal a/c for 3 years 2003, 04, 05. Depreciate Machinery at 1096 p.a. by W.D.V. method.

Question : 7 A Plant & Machinery costing ₹10,00,000 is depreciated on straight line assuming 10 year working life and zero residual value, for four years. At the end of the fourth year, the machinery was revalued upwards by ₹ 40,000. The remaining useful life was reassessed at 8 years. Calculate Depreciation for the fifth year.

Question :8 A Firm purchased an old Machinery for ₹ 37,000 on 1st January, 2015 and spent ₹ 3,000 on its overhauling. On 1st July 2016, another machine was purchased for ₹ 10,000. On 1st July 2017, the machinery which was purchased on 1st January 2015, was sold for ₹ 28,000 and the same day a new machinery costing ₹ 25,000 was purchased. On 1st July, 2018, the machine which was purchased on 1st July, 2016 was sold for ₹ 2,000.

Depreciation is charged @10% per annum on straight line method. The firm changed the method and adopted diminishing balance method with effect from 1st January, 2016 and the rate was increased to 15% per annum. The books are closed on 31st December every year.

Prepare Machinery account for four years from 1st January, 2015.
Solution:
Machinery Account

DATE                 PARTICULARS            AMT          DATE              PARTICULARS               AMT

2015                                                                           2015      

JAN  1             TO BANK A/C 1ST         40,000    DEC 31       BY DEPRECIATION A/C       4000 

                          (37000+3000)                                                  BY BALANCE C/D                36000

                                          TOTAL           40,000                                         TOTAL                  40,000

2016                                                                                2016         

JAN 1            TO BALANCE B/D             36000      DEC 31    BY DEPRECIATION A/C 

JULY 1         TO BANK A/C[ IInd ]           10000                                     Ist                 5400

                                                                                                                    IInd               750           6150              

                                                                                                          BY BALANCE C/D  

                                                                                                                               Ist                 30600

                                                                                                                              IInd                9250          39850

                                   total                       46000                                          total                            46000

2017                                                                                  2017                                                                         

jan 1         to balance b/d                                             july 1          by dep a/c                                           2295 

                     1st         30600                                                              by bank a/c                                         28000

                     2nd        9250                          39850                          by profit & loss a/c                             305

july 1        to bank a/c [ IIIrd]                     25000                           by dep a/c

                                                                                                                      IInd       1388

                                                                                                                       IIIrd      1875                                3263

                                                                                                            by bal c/d                                              

                                                                                                                        IInd    7862                                     

                                                                                                                        IIIrd      23125                              30987

                                       TOTAL              64850                                  TOTAL                                                  64850     

2018                                                                             2018

JAN 1           TO  bal b/d                                             july 1         by  dep a/c                                                   590

                               IInd      7862                                                    by bank a/c                                                2000

                               IIIrd      23125        30987                                by profit & loss a/c (2)                              5272

                                                                                                         by dep a/c                                                   3469

                                                                                                          by bal c/d                                                    19656         

                                       total                30987                              total                                                               30987                                                

working notes :  

1)  calculation of loss on 1st machinery :     

BALANCE OF MACHINERY   AS ON 1 JAN,2017                                                          30600

 LESS:  DEP UPTO 1ST JULY,2017                                                                                     2295

                                                                                                                                             28305

 LESS: SALE VALUE OF MACHINERY                                                                            28000

                                                                                                                                                  305

2] CALCULATION OF LOSS ON IInd  MACHINERY:

BALANCE  OF MACHINERY AS ON 1 JAN, 2018                                                            7862

LESS :  DEP UPTO 1 JULY,2018                                                                                          590   

                                                                                                                                               7272

LESS : SALE VALUE OF MACHINERY                                                                             2000        

                                                                                                                                               5272                                        

True or False

Question 1.
Land is also a depreciable asset.
Answer:
False: Land is not a depreciable asset because it does not qualify for depreciation as per AS-10.

Question 2.
Depreciation is a cash expenditure like other normal expenses.
Answer:
False: Depreciation is a non-cash expenditure because it does not involve any cash outflow.

Question 3.
Depreciation is an amortised expenditure.
Answer:
True: Depreciation is charged on value of fixed asset over its useful life. So, by way of depreciation any capital expenditure is amortised over its useful life.

Question 4.
Depreciation cannot be provided in case of loss, in a financial year.
Answer:
False: Depreciation is a charge against profit so it has to be provided for whether there is a profit or loss in a financial year of the business.

Question 5.
Depreciable amount refers to the difference between historical cost and the market value of an asset.
Answer:
False: Depreciable amount refers to historical cost less salvage value.

Question 6.
Depreciation is a non-cash expense and does not result in any cash outflow.
Answer:
True: Depreciation is a non cash expense and there is no outflow of cash in the business.

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