Depreciation, Provisions and Reserves Class 11 Financial Accounting 1 NCERT Solutions

Q1Long Answers

Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

Solution

Concept of Depreciation

Depreciation is a measure of the wearing out, consumption, or other loss of value of a depreciable asset arising from use, the passage of time (effluxion of time), or obsolescence through technology and market changes. In accounting, it is the process of allocating the depreciable cost of a tangible fixed asset in a systematic and rational manner over the periods expected to benefit from its use. It is a non-cash expense that represents the expired cost of the asset for a particular accounting period. It is a charge against profit and is based on the book value of an asset, not its market value.

Need for Charging Depreciation

Charging depreciation is essential for several reasons:

To Ascertain True Profit or Loss: Fixed assets are used to generate revenue. The cost of using these assets (depreciation) must be charged against the revenue of the period to determine the correct profit or loss, in line with the matching principle.
To Present a True and Fair Financial Position: If depreciation is not accounted for, fixed assets would be shown in the balance sheet at their original cost year after year. This would overstate the value of assets and not reflect the true financial position of the business.
Cost of Production: For manufacturing entities, depreciation is an important element of the cost of production. Without including it, the cost of production would be understated.
To Retain Funds for Replacement: Depreciation is a non-cash expense. By debiting it to the profit and loss account, the amount of profit available for distribution is reduced. This retained profit can be used as a source of funds for replacing the asset when it becomes obsolete or worn out.
Compliance with Legal Requirements: Laws, such as the Companies Act, require businesses to charge depreciation on their fixed assets.
Tax Consideration: Depreciation is an allowable expense for tax purposes, and charging it helps in arriving at the correct tax liability.

Causes of Depreciation

The primary causes for the decline in the value of a fixed asset are:

Wear and Tear: This is the physical deterioration of an asset resulting from its constant use in operations.
Effluxion of Time: An asset's value diminishes with the mere passage of time, even if it is not being used. This is due to exposure to natural forces like wind, rain, and sun.
Obsolescence: An asset may become outdated or redundant due to external factors like technological advancements, changes in production methods, or shifts in market demand for the product it helps create.
Expiration of Legal Rights: The value of assets like patents, copyrights, and leases decreases as their legal life or term comes to an end.
Abnormal Factors: Unexpected events like accidents, fire, or natural disasters can cause a sudden and permanent decline in an asset's value.

Q2Long Answers

Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.

Solution

Straight Line Method (SLM)

The Straight Line Method, also known as the Fixed Installment Method, is the simplest and most widely used method of calculating depreciation. It is based on the assumption that an asset provides equal utility or benefits throughout its useful life. Under this method, a fixed and equal amount of depreciation is charged to the Profit and Loss Account in every accounting period during the asset's lifetime.

The amount of annual depreciation is calculated using the formula: Annual Depreciation = (Cost of Asset - Estimated Net Residual Value) / Estimated Useful Life of the Asset

The key features are a constant annual depreciation charge and the asset's book value declining in a straight line to its scrap value over its life.

Written Down Value Method (WDV)

The Written Down Value Method, also known as the Reducing Balance or Diminishing Value Method, is based on the assumption that the benefits derived from an asset are higher in its earlier years and diminish as it gets older. Under this method, depreciation is calculated at a fixed percentage on the book value (or written down value) of the asset at the beginning of each year. As the book value reduces every year, the amount of depreciation also decreases year after year.

The formula to find the rate of depreciation is: R = [1 - n√(s/c)] × 100 Where, R = Rate of Depreciation, n = Useful Life, s = Scrap Value, c = Cost of Asset.

Distinction between SLM and WDV Method

Basis	Straight Line Method	Written Down Value Method
Basis of Calculation	Calculated on the Original Cost.	Calculated on the Book Value (WDV) at the start of the year.
Annual Depreciation	Remains constant every year.	Decreases every year.
Total Charge	Total charge (Depreciation + Repairs) increases over time as repair costs rise.	Total charge (Depreciation + Repairs) remains relatively uniform as decreasing depreciation is offset by rising repair costs.
Asset Value	Can be written down to zero or scrap value.	Can never be written down to zero.
Tax Recognition	Generally not recognized by tax laws.	Recognized by tax laws for tax computation.

Situations Where They Are Useful

Straight Line Method is useful for assets:
- Whose useful life can be estimated accurately.
- That are used consistently year after year.
- That have low repair and maintenance costs which do not increase significantly with age.
- Where obsolescence is not a major factor.
- Examples: Leasehold buildings, patents, copyrights, trademarks.
Written Down Value Method is useful for assets:
- That are subject to a high rate of technological obsolescence.
- Whose utility is higher in the earlier years.
- That require increased repair and maintenance expenses with the passage of time.
- Examples: Plant and machinery, vehicles, computers, and other electronic equipment.

Q3Long Answers

Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

Solution

There are two primary methods for recording depreciation in the books of account:

Method 1: Charging Depreciation to the Asset Account

Under this method, the depreciation for the period is directly credited to the respective asset account. This reduces the book value of the asset each year. The asset account in the ledger thus shows the written down value at the end of each period. In the balance sheet, the asset is shown at its net book value (Cost less depreciation charged till date).

Journal Entries:

For purchase of an asset:

Asset A/c Dr. To Bank/Vendor A/c (Being asset purchased)
At the end of each accounting year:

(a) For charging depreciation:

Depreciation A/c Dr. To Asset A/c (Being depreciation provided on the asset)

(b) For transferring depreciation to Profit & Loss A/c:

Profit & Loss A/c Dr. To Depreciation A/c (Being depreciation transferred to P&L A/c)

Method 2: Creating a Provision for Depreciation / Accumulated Depreciation Account

Under this method, the depreciation for the period is not credited to the asset account. Instead, it is credited to a separate account called 'Provision for Depreciation Account' or 'Accumulated Depreciation Account'. This allows the asset account to continue to be shown at its original cost throughout its useful life. The Provision for Depreciation account accumulates the total depreciation charged on the asset over the years.

In the balance sheet, the asset is shown at its original cost on the asset side, and the accumulated depreciation is shown either on the liabilities side or as a deduction from the original cost of the asset on the asset side.

Journal Entries:

For purchase of an asset:

Asset A/c Dr. To Bank/Vendor A/c (Being asset purchased)
At the end of each accounting year:

(a) For accumulating depreciation:

Depreciation A/c Dr. To Provision for Depreciation A/c (Being depreciation provided and credited to provision account)

(b) For transferring depreciation to Profit & Loss A/c:

Profit & Loss A/c Dr. To Depreciation A/c (Being depreciation transferred to P&L A/c)

When the asset is sold, the accumulated depreciation related to that asset is transferred from the Provision for Depreciation Account to the Asset Account (or Asset Disposal Account) to determine the profit or loss on sale.

Q4Long Answers

Explain determinants of the amount of depreciation.

Solution

The determination of the amount of depreciation to be charged in an accounting period depends on three fundamental parameters. These are the determinants of depreciation.

Cost of the Asset (Original or Historical Cost): This is the primary basis for calculating depreciation. The cost of an asset is not just its purchase price; it includes all expenses incurred to acquire the asset and bring it to a usable condition. According to Accounting Standard-6, the cost includes:
- The invoice price of the asset.
- Additional costs such as freight and transportation, transit insurance.
- Installation and commissioning costs.
- Registration costs (for vehicles, etc.).
- Any additions or improvements that enhance the asset's value or life. For a second-hand asset, the initial repair costs incurred to make it workable are also part of its cost. This total cost is the amount that will be allocated as depreciation over the asset's life.
Estimated Useful Life of the Asset: This refers to the period over which an asset is expected to be used by the enterprise. It is the economic or commercial life, not necessarily the physical life, of the asset. An asset might still be physically present but may not be capable of commercially viable production. The estimation of useful life is a matter of judgment and depends on several factors:
- Usage level and number of shifts.
- Repair and maintenance policy.
- Technological changes and obsolescence.
- Legal or contractual limits (e.g., in the case of a lease). The useful life can be expressed in years, number of production units, or working hours.
Estimated Net Residual Value (Salvage or Scrap Value): This is the estimated net realizable value of the asset at the end of its useful life. It is the amount the business expects to receive from selling the asset after it is no longer useful, minus any anticipated disposal costs. The total amount of depreciation charged over an asset's life is its depreciable cost, which is calculated by subtracting the salvage value from the asset's total cost. Depreciable Cost = Cost of Asset - Estimated Net Residual Value It is this depreciable cost that is distributed as depreciation expense over the estimated useful life of the asset.

Q5Long Answers

Name and explain different types of reserves in details.

Solution

Reserves are appropriations of profit, set aside to strengthen the financial position of a business. They can be broadly classified based on their purpose and the source of their creation.

A. Classification based on Purpose:

General Reserve: This reserve is created without any specific purpose. It is also known as a free reserve or contingency reserve. The management can use a general reserve for any purpose it deems appropriate, such as to finance business expansion, to improve the working capital position, to meet unforeseen contingencies, or to distribute dividends in a year of inadequate profit. Its primary objective is to enhance the overall financial soundness of the business.
Specific Reserve: This reserve is created for a specific, pre-determined purpose and can only be utilized for that particular purpose. It cannot be used for dividend distribution. Examples include:
- Dividend Equalisation Reserve: Created to maintain a stable rate of dividend. In years of high profit, funds are transferred to this reserve, and in years of low profit, funds are drawn from it to supplement the distributable profit.
- Debenture Redemption Reserve (DRR): A statutory reserve created to provide funds for the repayment (redemption) of debentures on maturity.
- Workmen Compensation Fund: Created to provide for claims from workers arising due to accidents.
- Investment Fluctuation Fund: Created to absorb any decline in the market value of investments.

B. Classification based on Source of Creation:

Revenue Reserves: These reserves are created out of revenue profits, which are the profits earned from the normal operating activities of the business. These profits are otherwise available for distribution as dividends to the shareholders. All the reserves mentioned above (General, Dividend Equalisation, etc.) are examples of revenue reserves.
Capital Reserves: These reserves are created out of capital profits, which are profits that do not arise from the regular course of business operations. Capital profits are generally not available for distribution as cash dividends. Capital reserves are used for specific purposes like writing off capital losses or issuing bonus shares. Examples of capital profits that lead to capital reserves include:
- Premium on the issue of shares or debentures.
- Profit on the sale of fixed assets.
- Profit on the redemption of debentures.
- Profit on the revaluation of assets and liabilities.

Q6Long Answers

What are 'provisions'. How are they created? Give accounting treatment in case of provision for doubtful Debts.

Solution

Concept of 'Provisions'

A provision is an amount set aside as a charge against profit to provide for a known liability or a probable loss related to the current accounting period, the amount of which cannot be determined with exact accuracy. The creation of provisions is a requirement under the principle of prudence or conservatism, which dictates that all expected losses should be accounted for, but expected profits should not. It is a charge against profit, meaning it must be created regardless of whether the business has made a profit or a loss.

Examples include Provision for Depreciation, Provision for Taxation, and Provision for Doubtful Debts.

Creation of Provisions

Provisions are created by debiting the Profit and Loss Account and crediting a separate provision account. This ensures that the profit for the current period is correctly stated by matching revenues with all related costs and expected losses.

Accounting Treatment for Provision for Doubtful Debts

When a business sells goods on credit, it creates debtors. It is a common business experience that not all debtors will pay their dues in full. The expected loss on account of non-payment from some debtors is accounted for by creating a Provision for Doubtful Debts.

The accounting treatment involves the following steps:

Write off any further bad debts: First, any debts that have been confirmed as irrecoverable during the year but not yet recorded are written off. The journal entry is:

Bad Debts A/c Dr. To Sundry Debtors A/c (Being further bad debts written off)
Transfer total bad debts to P&L Account: The total bad debts for the year (opening balance + further bad debts) are transferred to the Profit and Loss Account.

Profit and Loss A/c Dr. To Bad Debts A/c (Being bad debts transferred)
Create the new provision: A provision is calculated as a certain percentage of the good sundry debtors remaining after writing off all bad debts.
- Calculation: New Provision = (Total Debtors - Further Bad Debts) × Rate of Provision / 100
- The journal entry to create the provision is:
Profit and Loss A/c Dr. To Provision for Doubtful Debts A/c (Being provision for doubtful debts created)

Presentation in Financial Statements:

In the Profit and Loss Account: The total amount comprising bad debts for the year and the new provision created is shown as an expense on the debit side.
In the Balance Sheet: The amount of Sundry Debtors is shown on the asset side, and the Provision for Doubtful Debts is deducted from it to show the net realizable value.

Assets Side: Sundry Debtors xxx Less: Provision for Doubtful Debts (xxx) ------ xxx ------

Q1Numerical Problems

On April 01, 2010, Bajrang Marbles purchased a Machine for ₹ 1,80,000 and spent ₹ 10,000 on its carriage and ₹ 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be ₹ 20,000.

(a)

Prepare Machine account and Depreciation account for the first four years by providing depreciation on straight line method. Accounts are closed on March 31st every year.

(b)

Prepare Machine account, Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year.

Solution

Working Notes:

Calculation of Original Cost of Machine: Purchase Price = ₹ 1,80,000 Add: Carriage = ₹ 10,000 Add: Installation = ₹ 10,000 Original Cost = ₹ 2,00,000
Calculation of Annual Depreciation (Straight Line Method): Annual Depreciation = (Cost of Asset - Scrap Value) / Useful Life = (₹ 2,00,000 - ₹ 20,000) / 10 years = ₹ 1,80,000 / 10 = ₹ 18,000 per year

(a) When Depreciation is charged to Asset Account

Dr. Machine Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010 Apr 01	To Bank A/c	2,00,000	2011 Mar 31	By Depreciation A/c	18,000
			2011 Mar 31	By Balance c/d	1,82,000
		2,00,000			2,00,000
2011 Apr 01	To Balance b/d	1,82,000	2012 Mar 31	By Depreciation A/c	18,000
			2012 Mar 31	By Balance c/d	1,64,000
		1,82,000			1,82,000
2012 Apr 01	To Balance b/d	1,64,000	2013 Mar 31	By Depreciation A/c	18,000
			2013 Mar 31	By Balance c/d	1,46,000
		1,64,000			1,64,000
2013 Apr 01	To Balance b/d	1,46,000	2014 Mar 31	By Depreciation A/c	18,000
			2014 Mar 31	By Balance c/d	1,28,000
		1,46,000			1,46,000
2014 Apr 01	To Balance b/d	1,28,000

Dr. Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Mar 31	To Machine A/c	18,000	2011 Mar 31	By Profit & Loss A/c	18,000
2012 Mar 31	To Machine A/c	18,000	2012 Mar 31	By Profit & Loss A/c	18,000
2013 Mar 31	To Machine A/c	18,000	2013 Mar 31	By Profit & Loss A/c	18,000
2014 Mar 31	To Machine A/c	18,000	2014 Mar 31	By Profit & Loss A/c	18,000

(b) When Provision for Depreciation Account is maintained

Dr. Machine Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010 Apr 01	To Bank A/c	2,00,000	2011 Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000
2011 Apr 01	To Balance b/d	2,00,000	2012 Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000
2012 Apr 01	To Balance b/d	2,00,000	2013 Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000
2013 Apr 01	To Balance b/d	2,00,000	2014 Mar 31	By Balance c/d	2,00,000
		2,00,000			2,00,000
2014 Apr 01	To Balance b/d	2,00,000

Dr. Provision for Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Mar 31	To Balance c/d	18,000	2011 Mar 31	By Depreciation A/c	18,000
		18,000			18,000
2012 Mar 31	To Balance c/d	36,000	2012 Mar 31	By Balance b/d	18,000
			2012 Mar 31	By Depreciation A/c	18,000
		36,000			36,000
2013 Mar 31	To Balance c/d	54,000	2013 Mar 31	By Balance b/d	36,000
			2013 Mar 31	By Depreciation A/c	18,000
		54,000			54,000
2014 Mar 31	To Balance c/d	72,000	2014 Mar 31	By Balance b/d	54,000
			2014 Mar 31	By Depreciation A/c	18,000
		72,000			72,000
			2014 Apr 01	By Balance b/d	72,000

Dr. Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Mar 31	To Provision for Dep. A/c	18,000	2011 Mar 31	By Profit & Loss A/c	18,000
2012 Mar 31	To Provision for Dep. A/c	18,000	2012 Mar 31	By Profit & Loss A/c	18,000
2013 Mar 31	To Provision for Dep. A/c	18,000	2013 Mar 31	By Profit & Loss A/c	18,000
2014 Mar 31	To Provision for Dep. A/c	18,000	2014 Mar 31	By Profit & Loss A/c	18,000

Q2Numerical Problems

On July 01, 2010, Ashok Ltd. Purchased a Machine for ₹ 1,08,000 and spent ₹ 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be ₹ 12,000. Prepare machine account and depreciation Account in the books of Ashok Ltd. For first three years, if depreciation is written off according to straight line method. The account are closed on December 31st, every year.

Solution

Working Notes:

Calculation of Original Cost of Machine: Purchase Price = ₹ 1,08,000 Add: Installation = ₹ 12,000 Original Cost = ₹ 1,20,000
Calculation of Annual Depreciation (Straight Line Method): Annual Depreciation = (Cost of Asset - Salvage Value) / Useful Life = (₹ 1,20,000 - ₹ 12,000) / 12 years = ₹ 1,08,000 / 12 = ₹ 9,000 per year
Depreciation for the year 2010: The machine was purchased on July 01, 2010. So, depreciation for 2010 will be for 6 months (July to December). Depreciation (2010) = ₹ 9,000 × (6/12) = ₹ 4,500

In the books of Ashok Ltd.

Dr. Machine Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010 Jul 01	To Bank A/c	1,20,000	2010 Dec 31	By Depreciation A/c	4,500
			2010 Dec 31	By Balance c/d	1,15,500
		1,20,000			1,20,000
2011 Jan 01	To Balance b/d	1,15,500	2011 Dec 31	By Depreciation A/c	9,000
			2011 Dec 31	By Balance c/d	1,06,500
		1,15,500			1,15,500
2012 Jan 01	To Balance b/d	1,06,500	2012 Dec 31	By Depreciation A/c	9,000
			2012 Dec 31	By Balance c/d	97,500
		1,06,500			1,06,500
2013 Jan 01	To Balance b/d	97,500

Dr. Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010 Dec 31	To Machine A/c	4,500	2010 Dec 31	By Profit & Loss A/c	4,500
		4,500			4,500
2011 Dec 31	To Machine A/c	9,000	2011 Dec 31	By Profit & Loss A/c	9,000
		9,000			9,000
2012 Dec 31	To Machine A/c	9,000	2012 Dec 31	By Profit & Loss A/c	9,000
		9,000			9,000

Q3Numerical Problems

Reliance Ltd. Purchased a second hand machine for ₹ 56,000 on October 01, 2011 and spent ₹ 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for ₹ 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of ₹ 1,000 is expected to be incurred to recover the salvage value of ₹ 6,000 . Prepare machine account and Provision for depreciation account for the first three years charging depreciation by fixed installment Method. Accounts are closed on March 31, every year.

Solution

Working Notes:

Calculation of Original Cost of Machine: Purchase Price = ₹ 56,000 Add: Overhaul & Installation = ₹ 28,000 Original Cost = ₹ 84,000
Calculation of Net Residual Value (Salvage Value): Estimated Sale Value = ₹ 6,000 Less: Cost to recover = ₹ 1,000 Net Residual Value = ₹ 5,000
Calculation of Annual Depreciation (Fixed Installment Method): Annual Depreciation = (Cost of Asset - Net Residual Value) / Useful Life = (₹ 84,000 - ₹ 5,000) / 15 years = ₹ 79,000 / 15 = ₹ 5,267 per year (approx.)
Depreciation for relevant periods:
- Year 2011-12 (6 months): From Oct 01, 2011, to Mar 31, 2012. Depreciation = ₹ 5,267 × (6/12) = ₹ 2,634
- Year 2012-13 (Full year): ₹ 5,267
- Year 2013-14 (Full year): ₹ 5,267

In the books of Reliance Ltd.

Dr. Machine Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Oct 01	To Bank A/c	84,000	2012 Mar 31	By Balance c/d	84,000
		84,000			84,000
2012 Apr 01	To Balance b/d	84,000	2013 Mar 31	By Balance c/d	84,000
		84,000			84,000
2013 Apr 01	To Balance b/d	84,000	2014 Mar 31	By Balance c/d	84,000
		84,000			84,000
2014 Apr 01	To Balance b/d	84,000

Dr. Provision for Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2012 Mar 31	To Balance c/d	2,634	2012 Mar 31	By Depreciation A/c	2,634
		2,634			2,634
2013 Mar 31	To Balance c/d	7,901	2013 Apr 01	By Balance b/d	2,634
			2013 Mar 31	By Depreciation A/c	5,267
		7,901			7,901
2014 Mar 31	To Balance c/d	13,168	2014 Apr 01	By Balance b/d	7,901
			2014 Mar 31	By Depreciation A/c	5,267
		13,168			13,168
			2014 Apr 01	By Balance b/d	13,168

(Note: The answer provided in the textbook, ₹18,200, does not seem to be derivable from the data given in the question. The solution above is based on the correct application of the fixed installment method to the provided figures.)

Q4Numerical Problems

Berlia Ltd. Purchased a second hand machine for ₹ 56,000 on July 01, 2015 and spent ₹ 24,000 on its repair and installation and ₹ 5,000 for its carriage. On September 01, 2016, it purchased another machine for ₹ 2,50,000 and spent ₹ 10,000 on its installation.

(a)

Depreciation is provided on machinery @ 10% p.a on original cost method annually on December 31. Prepare machinery account and depreciation account from the year 2015 to 2018.

(b)

Prepare machinery account and depreciation account from the year 2011 to 2018, if depreciation is provided on machinery @ 10% p.a. on written down value method annually on December 31.

Solution

Working Notes:

Machine 1 (M1): Purchased on July 01, 2015 Cost = ₹ 56,000 (Purchase) + ₹ 24,000 (Repair) + ₹ 5,000 (Carriage) = ₹ 85,000
Machine 2 (M2): Purchased on September 01, 2016 Cost = ₹ 2,50,000 (Purchase) + ₹ 10,000 (Installation) = ₹ 2,60,000

(a) Original Cost Method (SLM)

Depreciation Calculation:

2015: On M1 for 6 months (Jul-Dec) = 85,000 x 10% x 6/12 = ₹ 4,250
2016: On M1 for full year = 85,000 x 10% = ₹ 8,500. On M2 for 4 months (Sep-Dec) = 2,60,000 x 10% x 4/12 = ₹ 8,667. Total = ₹ 17,167
2017: On M1 (₹ 8,500) + On M2 (₹ 2,60,000 x 10% = ₹ 26,000). Total = ₹ 34,500
2018: On M1 (₹ 8,500) + On M2 (₹ 26,000). Total = ₹ 34,500

Dr. Machinery Account (SLM) Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Jul 01	To Bank A/c (M1)	85,000	2015 Dec 31	By Depreciation A/c	4,250
			2015 Dec 31	By Balance c/d	80,750
		85,000			85,000
2016 Jan 01	To Balance b/d	80,750	2016 Dec 31	By Depreciation A/c	17,167
2016 Sep 01	To Bank A/c (M2)	2,60,000	2016 Dec 31	By Balance c/d	3,23,583
		3,40,750			3,40,750
2017 Jan 01	To Balance b/d	3,23,583	2017 Dec 31	By Depreciation A/c	34,500
			2017 Dec 31	By Balance c/d	2,89,083
		3,23,583			3,23,583
2018 Jan 01	To Balance b/d	2,89,083	2018 Dec 31	By Depreciation A/c	34,500
			2018 Dec 31	By Balance c/d	2,54,583
		2,89,083			2,89,083
2019 Jan 01	To Balance b/d	2,54,583

(b) Written Down Value Method (WDV) (Note: Question asks from 2011, but data starts from 2015. So solving from 2015)

Depreciation Calculation:

2015: On M1 for 6 months = 85,000 x 10% x 6/12 = ₹ 4,250. WDV of M1 = 80,750
2016: On M1 for full year = 80,750 x 10% = ₹ 8,075. On M2 for 4 months = 2,60,000 x 10% x 4/12 = ₹ 8,667. Total = ₹ 16,742
WDV at end of 2016: M1 (80750-8075)=72,675; M2 (260000-8667)=2,51,333. Total WDV = 3,24,008
2017: On total WDV = 3,24,008 x 10% = ₹ 32,401. WDV at end of 2017 = 3,24,008 - 32,401 = 2,91,607
2018: On total WDV = 2,91,607 x 10% = ₹ 29,161. WDV at end of 2018 = 2,91,607 - 29,161 = 2,62,446

Dr. Machinery Account (WDV) Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Jul 01	To Bank A/c (M1)	85,000	2015 Dec 31	By Depreciation A/c	4,250
			2015 Dec 31	By Balance c/d	80,750
		85,000			85,000
2016 Jan 01	To Balance b/d	80,750	2016 Dec 31	By Depreciation A/c	16,742
2016 Sep 01	To Bank A/c (M2)	2,60,000	2016 Dec 31	By Balance c/d	3,24,008
		3,40,750			3,40,750
2017 Jan 01	To Balance b/d	3,24,008	2017 Dec 31	By Depreciation A/c	32,401
			2017 Dec 31	By Balance c/d	2,91,607
		3,24,008			3,24,008
2018 Jan 01	To Balance b/d	2,91,607	2018 Dec 31	By Depreciation A/c	29,161
			2018 Dec 31	By Balance c/d	2,62,446
		2,91,607			2,91,607
2019 Jan 01	To Balance b/d	2,62,446

(Depreciation account for both methods will simply show the amounts calculated above being transferred to P&L A/c each year.)

Q5Numerical Problems

Ganga Ltd. purchased a machinery on January 01, 2014 for ₹ 5,50,000 and spent ₹ 50,000 on its installation. On September 01, 2014 it purchased another machine for ₹ 3,70,000. On May 01, 2015 it purchased another machine for ₹ 8,40,000 (including installation expenses). Depreciation was provided on machinery @ 10% p.a. on original cost method annually on December 31. Prepare:

(a)

Machinery account and depreciation account for the years 2014, 2015, 2016 and 2017.

(b)

If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2014, 2015, 2016 and 2017.

Solution

Working Notes:

Machine 1 (M1): Purchased on Jan 01, 2014. Cost = 5,50,000 + 50,000 = ₹ 6,00,000
Machine 2 (M2): Purchased on Sep 01, 2014. Cost = ₹ 3,70,000
Machine 3 (M3): Purchased on May 01, 2015. Cost = ₹ 8,40,000

Depreciation Calculation (SLM @ 10% p.a.):

2014:
- M1 (full year): 6,00,000 x 10% = ₹ 60,000
- M2 (4 months): 3,70,000 x 10% x 4/12 = ₹ 12,333
- Total 2014 = ₹ 72,333
2015:
- M1 (full year): ₹ 60,000
- M2 (full year): 3,70,000 x 10% = ₹ 37,000
- M3 (8 months): 8,40,000 x 10% x 8/12 = ₹ 56,000
- Total 2015 = ₹ 1,53,000
2016 & 2017 (each year):
- M1: ₹ 60,000
- M2: ₹ 37,000
- M3: 8,40,000 x 10% = ₹ 84,000
- Total 2016/2017 = ₹ 1,81,000

(a) Machinery Account and Depreciation Account

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Jan 01	To Bank A/c (M1)	6,00,000	2014 Dec 31	By Depreciation A/c	72,333
2014 Sep 01	To Bank A/c (M2)	3,70,000	2014 Dec 31	By Balance c/d	8,97,667
		9,70,000			9,70,000
2015 Jan 01	To Balance b/d	8,97,667	2015 Dec 31	By Depreciation A/c	1,53,000
2015 May 01	To Bank A/c (M3)	8,40,000	2015 Dec 31	By Balance c/d	15,84,667
		17,37,667			17,37,667
2016 Jan 01	To Balance b/d	15,84,667	2016 Dec 31	By Depreciation A/c	1,81,000
			2016 Dec 31	By Balance c/d	14,03,667
		15,84,667			15,84,667
2017 Jan 01	To Balance b/d	14,03,667	2017 Dec 31	By Depreciation A/c	1,81,000
			2017 Dec 31	By Balance c/d	12,22,667
		14,03,667			14,03,667
2018 Jan 01	To Balance b/d	12,22,667

(The Depreciation Account will show the respective amounts transferred to P&L A/c each year)

(b) Machine Account and Provision for Depreciation Account

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Jan 01	To Bank A/c (M1)	6,00,000	2014 Dec 31	By Balance c/d	9,70,000
2014 Sep 01	To Bank A/c (M2)	3,70,000
		9,70,000			9,70,000
2015 Jan 01	To Balance b/d	9,70,000	2015 Dec 31	By Balance c/d	18,10,000
2015 May 01	To Bank A/c (M3)	8,40,000
		18,10,000			18,10,000
2016 Jan 01	To Balance b/d	18,10,000	2016 Dec 31	By Balance c/d	18,10,000
2017 Jan 01	To Balance b/d	18,10,000	2017 Dec 31	By Balance c/d	18,10,000

Dr. Provision for Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Dec 31	To Balance c/d	72,333	2014 Dec 31	By Depreciation A/c	72,333
		72,333			72,333
2015 Dec 31	To Balance c/d	2,25,333	2015 Jan 01	By Balance b/d	72,333
			2015 Dec 31	By Depreciation A/c	1,53,000
		2,25,333			2,25,333
2016 Dec 31	To Balance c/d	4,06,333	2016 Jan 01	By Balance b/d	2,25,333
			2016 Dec 31	By Depreciation A/c	1,81,000
		4,06,333			4,06,333
2017 Dec 31	To Balance c/d	5,87,333	2017 Jan 01	By Balance b/d	4,06,333
			2017 Dec 31	By Depreciation A/c	1,81,000
		5,87,333			5,87,333
			2018 Jan 01	By Balance b/d	5,87,333

Q6Numerical Problems

Azad Ltd. purchased furniture on October 01, 2014 for ₹ 4,50,000. On March 01, 2015 it purchased another furniture for ₹ 3,00,000. On July 01, 2016 it sold off the first furniture purchased in 2014 for ₹ 2,25,000. Depreciation is provided at 15% p.a. on written down value method each year. Accounts are closed each year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on March 31, 2015, March 31, 2016 and March 31, 2017. Also give the above two accounts if furniture disposal account is opened.

Solution

This solution is presented assuming a Provision for Depreciation (Accumulated Depreciation) account is maintained, as requested.

Working Notes:

Furniture 1 (F1): Cost = ₹ 4,50,000 (Purchased Oct 01, 2014)
Furniture 2 (F2): Cost = ₹ 3,00,000 (Purchased Mar 01, 2015)

Depreciation Calculation (WDV @ 15% p.a.):

Year 2014-15 (ending Mar 31, 2015):
- Dep on F1 (6 months): 4,50,000 x 15% x 6/12 = ₹ 33,750
- Dep on F2 (1 month): 3,00,000 x 15% x 1/12 = ₹ 3,750
- Total Dep 2014-15 = ₹ 37,500
- WDV of F1 = 4,50,000 - 33,750 = 4,16,250
- WDV of F2 = 3,00,000 - 3,750 = 2,96,250
Year 2015-16 (ending Mar 31, 2016):
- Dep on F1 (full year): 4,16,250 x 15% = ₹ 62,438
- Dep on F2 (full year): 2,96,250 x 15% = ₹ 44,438
- Total Dep 2015-16 = ₹ 1,06,876
- WDV of F1 = 4,16,250 - 62,438 = 3,53,812
- WDV of F2 = 2,96,250 - 44,438 = 2,51,812
Year 2016-17 (ending Mar 31, 2017):
- Sale of F1 on July 01, 2016:
  - Dep on F1 for 3 months (Apr-Jun): 3,53,812 x 15% x 3/12 = ₹ 13,268
  - WDV on date of sale = 3,53,812 - 13,268 = ₹ 3,40,544
  - Sale Price = ₹ 2,25,000
  - Loss on Sale = 3,40,544 - 2,25,000 = ₹ 1,15,544
  - Total Accumulated Dep on F1 = 33,750 + 62,438 + 13,268 = ₹ 1,09,456
- Dep on F2 (full year): 2,51,812 x 15% = ₹ 37,772
- Total Dep for P&L 2016-17 = 13,268 (on F1) + 37,772 (on F2) = ₹ 51,040

Case 1: Without Furniture Disposal Account

Dr. Furniture Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Oct 01	To Bank A/c (F1)	4,50,000	2015 Mar 31	By Balance c/d	7,50,000
2015 Mar 01	To Bank A/c (F2)	3,00,000
		7,50,000			7,50,000
2015 Apr 01	To Balance b/d	7,50,000	2016 Mar 31	By Balance c/d	7,50,000
		7,50,000			7,50,000
2016 Apr 01	To Balance b/d	7,50,000	2016 Jul 01	By Bank A/c (Sale)	2,25,000
			2016 Jul 01	By Acc. Dep. A/c	1,09,456
			2016 Jul 01	By P&L A/c (Loss)	1,15,544
			2017 Mar 31	By Balance c/d	3,00,000
		7,50,000			7,50,000

Dr. Accumulated Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Mar 31	To Balance c/d	37,500	2015 Mar 31	By Depreciation A/c	37,500
		37,500			37,500
2016 Mar 31	To Balance c/d	1,44,376	2016 Mar 31	By Balance b/d	37,500
			2016 Mar 31	By Depreciation A/c	1,06,876
		1,44,376			1,44,376
2016 Jul 01	To Furniture A/c	1,09,456	2017 Mar 31	By Balance b/d	1,44,376
2017 Mar 31	To Balance c/d	85,960	2017 Mar 31	By Depreciation A/c	51,040
		1,95,416			1,95,416

Case 2: With Furniture Disposal Account

Dr. Furniture Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Oct 01	To Bank A/c (F1)	4,50,000	2015 Mar 31	By Balance c/d	7,50,000
2015 Mar 01	To Bank A/c (F2)	3,00,000
		7,50,000			7,50,000
2015 Apr 01	To Balance b/d	7,50,000	2016 Mar 31	By Balance c/d	7,50,000
2016 Apr 01	To Balance b/d	7,50,000	2016 Jul 01	By Furniture Disposal A/c	4,50,000
			2017 Mar 31	By Balance c/d	3,00,000
		7,50,000			7,50,000

Dr. Accumulated Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Mar 31	To Balance c/d	37,500	2015 Mar 31	By Depreciation A/c	37,500
2016 Mar 31	To Balance c/d	1,44,376	2016 Mar 31	By Balance b/d	37,500
			2016 Mar 31	By Depreciation A/c	1,06,876
		1,44,376			1,44,376
2016 Jul 01	To Furn. Disposal A/c	1,09,456	2017 Mar 31	By Balance b/d	1,44,376
2017 Mar 31	To Balance c/d	85,960	2017 Mar 31	By Depreciation A/c	51,040
		1,95,416			1,95,416

Dr. Furniture Disposal Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2016 Jul 01	To Furniture A/c	4,50,000	2016 Jul 01	By Acc. Dep. A/c	1,09,456
			2016 Jul 01	By Bank A/c	2,25,000
			2016 Jul 01	By P&L A/c (Loss)	1,15,544
		4,50,000			4,50,000

Q7Numerical Problems

M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2011 for ₹ 1,00,000. On July 01,2012 another machine costing ₹ 2,50,000 was purchased . The machine purchased on April 01, 2011 was sold for ₹ 25,000 on October 01, 2015. The company charges depreciation @ 15% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2016.

Solution

Working Notes:

Machine 1 (M1): Cost = ₹ 1,00,000 (Purchased Apr 01, 2011)
Machine 2 (M2): Cost = ₹ 2,50,000 (Purchased Jul 01, 2012)
Calculation of Loss on Sale of M1:
- Original Cost of M1 = ₹ 1,00,000
- Annual Depreciation on M1 = 1,00,000 x 15% = ₹ 15,000
- Depreciation for 2011-12 (full year) = ₹ 15,000
- Depreciation for 2012-13 (full year) = ₹ 15,000
- Depreciation for 2013-14 (full year) = ₹ 15,000
- Depreciation for 2014-15 (full year) = ₹ 15,000
- Depreciation for 2015-16 (6 months: Apr-Sep) = 15,000 x 6/12 = ₹ 7,500
- Total Accumulated Depreciation on M1 = 15,000+15,000+15,000+15,000+7,500 = ₹ 67,500
- Book Value on Oct 01, 2015 = 1,00,000 - 67,500 = ₹ 32,500
- Sale Price = ₹ 25,000
- Loss on Sale = 32,500 - 25,000 = ₹ 7,500
Depreciation for the year 2015-16:
- On M1 (for 6 months) = ₹ 7,500
- On M2 (for full year) = 2,50,000 x 15% = ₹ 37,500
- Total Depreciation for P&L A/c = 7,500 + 37,500 = ₹ 45,000
Balance of Machinery Account on April 01, 2015:
- Total Cost of machinery = 1,00,000 (M1) + 2,50,000 (M2) = ₹ 3,50,000
- Accumulated Dep. till Mar 31, 2015:
  - On M1 (4 years) = 15,000 x 4 = ₹ 60,000
  - On M2 (2 years 9 months) = 2,50,000 x 15% x (33/12) = ₹ 1,03,125
  - Total Acc. Dep. = 60,000 + 1,03,125 = ₹ 1,63,125
- Book Value on Apr 01, 2015 = 3,50,000 - 1,63,125 = ₹ 1,86,875

In the Books of M/s Lokesh Fabrics

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Apr 01	To Balance b/d	1,86,875	2015 Oct 01	By Machinery Disposal A/c	32,500
			2016 Mar 31	By Depreciation A/c	37,500
			2016 Mar 31	By Balance c/d	1,16,875
		1,86,875			1,86,875
2016 Apr 01	To Balance b/d	1,16,875

Dr. Machinery Disposal Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Oct 01	To Machinery A/c	32,500	2015 Oct 01	By Bank A/c (Sale)	25,000
			2015 Oct 01	By P&L A/c (Loss on Sale)	7,500
		32,500			32,500

(Note: The solution is prepared assuming depreciation is charged to the asset account. If a Provision for Depreciation account was maintained, the approach would be different, transferring original cost to the disposal account.)

Q8Numerical Problems

The following balances appear in the books of Crystal Ltd, on Jan 01, 2015 Machinery account on 15,00,000 Provision for depreciation account 5,50,000 On April 01, 2015 a machinery which was purchased on January 01, 2012 for ₹ 2,00,000 was sold for ₹ 75,000. A new machine was purchased on July 01, 2015 for ₹ 6,00,000. Depreciation is provided on machinery at 20% p.a. on Straight line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2015.

Solution

Working Notes:

1. Profit/Loss on Sale of Machinery:

Cost of machine sold (on Jan 01, 2012) = ₹ 2,00,000
Annual Depreciation = 2,00,000 x 20% = ₹ 40,000
Accumulated Depreciation on this machine till Dec 31, 2014:
- For 2012, 2013, 2014 (3 full years) = 40,000 x 3 = ₹ 1,20,000
Depreciation for 2015 (Jan 01 to Apr 01 = 3 months):
- 40,000 x 3/12 = ₹ 10,000
Total Accumulated Depreciation on date of sale = 1,20,000 + 10,000 = ₹ 1,30,000
Book Value on date of sale = Cost - Total Acc. Dep. = 2,00,000 - 1,30,000 = ₹ 70,000
Sale Price = ₹ 75,000
Profit on Sale = Sale Price - Book Value = 75,000 - 70,000 = ₹ 5,000

2. Depreciation for the year 2015:

On machine sold (for 3 months) = ₹ 10,000
On remaining old machines:
- Original Cost of remaining machines = 15,00,000 - 2,00,000 = ₹ 13,00,000
- Depreciation for full year = 13,00,000 x 20% = ₹ 2,60,000
On new machine (purchased Jul 01, 2015):
- Cost = ₹ 6,00,000
- Depreciation for 6 months (Jul-Dec) = 6,00,000 x 20% x 6/12 = ₹ 60,000
Total Depreciation to be charged in 2015 = 10,000 + 2,60,000 + 60,000 = ₹ 3,30,000

In the books of Crystal Ltd.

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Jan 01	To Balance b/d	15,00,000	2015 Apr 01	By Bank A/c (Sale)	75,000
2015 Jul 01	To Bank A/c	6,00,000	2015 Apr 01	By Prov. for Dep. A/c	1,30,000
2015 Apr 01	To P&L A/c (Profit)	5,000	2015 Dec 31	By Balance c/d	19,00,000
		21,05,000			21,05,000
2016 Jan 01	To Balance b/d	19,00,000

Dr. Provision for Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Apr 01	To Machinery A/c	1,30,000	2015 Jan 01	By Balance b/d	5,50,000
2015 Dec 31	To Balance c/d	7,50,000	2015 Dec 31	By Depreciation A/c	3,30,000
		8,80,000			8,80,000
			2016 Jan 01	By Balance b/d	7,50,000

(Note: The Machinery Account has been closed via a Machinery Disposal approach for clarity on sale, but combined in one account as requested. The closing balance of Machinery Account should be 19,00,000 (15,00,000 - 2,00,000 + 6,00,000). Let's re-prepare the Machinery Account without a disposal account for simplicity.)

Revised Machinery Account Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Jan 01	To Balance b/d	15,00,000	2015 Apr 01	By Machinery Disposal A/c	2,00,000
2015 Jul 01	To Bank A/c	6,00,000	2015 Dec 31	By Balance c/d	19,00,000
		21,00,000			21,00,000
2016 Jan 01	To Balance b/d	19,00,000

To complete the double entry, a Machinery Disposal Account is needed:

Dr. Machinery Disposal Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Apr 01	To Machinery A/c	2,00,000	2015 Apr 01	By Prov. for Dep. A/c	1,30,000
2015 Apr 01	To P&L A/c (Profit)	5,000	2015 Apr 01	By Bank A/c (Sale)	75,000
		2,05,000			2,05,000

(The Provision for Depreciation account remains the same. The Balance of Machine Account as on 31.12.15 is ₹ 19,00,000 and Provision for Depreciation is ₹4,90,000 (5,50,000 - 1,20,000 from sold machine + 3,30,000 - 10,000 from sold machine = 4,30,000 + 2,60,000 + 60,000 = 7,50,000 - 1,30,000 (transfer) + 3,30,000(current year) = 5,50,000 - 1,30,000 + 3,30,000 = 7,50,000. Let me recheck the closing balance. Opening 5,50,000 + Current Year Dep 3,30,000 = 8,80,000. Less transfer for sold machine 1,30,000. Closing Balance = 7,50,000. The provided answer key (₹4,90,000) seems incorrect. My calculated closing balance is ₹7,50,000)

Q9Numerical Problems

M/s. Excel Computers has a debit balance of ₹ 50,000 (original cost ₹ 1,20,000) in computers account on April 01, 2010. On July 01, 2010 it purchased another computer costing ₹ 2,50,000. One more computer was purchased on January 01, 2011 for ₹ 30,000. On April 01, 2014 the computer which has purchased on July 01, 2010 became obselete and was sold for ₹ 20,000. A new version of the IBM computer was purchased on August 01, 2014 for ₹ 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31, 2011, 2012, 2013, 2014 and 2015. The computer is depreciated @ 10 p.a. on straight line method basis.

Solution

Working Notes:

C1 (Existing): Original Cost = ₹ 1,20,000. WDV on Apr 01, 2010 = ₹ 50,000.
C2: Purchased Jul 01, 2010 for ₹ 2,50,000. Sold on Apr 01, 2014.
C3: Purchased Jan 01, 2011 for ₹ 30,000.
C4: Purchased Aug 01, 2014 for ₹ 80,000.

Depreciation Calculation (SLM @ 10% on Original Cost):

Annual Dep: C1 = 12,000; C2 = 25,000; C3 = 3,000; C4 = 8,000
2010-11:
- C1 (full year) = ₹ 12,000
- C2 (9 months) = 25,000 x 9/12 = ₹ 18,750
- C3 (3 months) = 3,000 x 3/12 = ₹ 750
- Total = ₹ 31,500
2011-12 & 2012-13 (each year):
- C1+C2+C3 = 12,000 + 25,000 + 3,000 = ₹ 40,000
2013-14: C1+C2+C3 = ₹ 40,000
Loss on Sale of C2 (on Apr 01, 2014):
- Original Cost = ₹ 2,50,000
- Depreciation till Mar 31, 2014:
  - 2010-11 (9 m) = 18,750
  - 2011-12 (12 m) = 25,000
  - 2012-13 (12 m) = 25,000
  - 2013-14 (12 m) = 25,000
  - Total Dep = ₹ 93,750
- WDV on Apr 01, 2014 = 2,50,000 - 93,750 = ₹ 1,56,250
- Sale Price = ₹ 20,000
- Loss on Sale = 1,56,250 - 20,000 = ₹ 1,36,250
2014-15:
- C1 (full year) = ₹ 12,000
- C3 (full year) = ₹ 3,000
- C4 (8 months) = 8,000 x 8/12 = ₹ 5,333
- Total = ₹ 20,333

Dr. Computers Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010 Apr 01	To Balance b/d	50,000	2011 Mar 31	By Depreciation A/c	31,500
2010 Jul 01	To Bank A/c (C2)	2,50,000	2011 Mar 31	By Balance c/d	2,99,250
2011 Jan 01	To Bank A/c (C3)	30,000
		3,30,000			3,30,000
2011 Apr 01	To Balance b/d	2,99,250	2012 Mar 31	By Depreciation A/c	40,000
			2012 Mar 31	By Balance c/d	2,59,250
		2,99,250			2,99,250
2012 Apr 01	To Balance b/d	2,59,250	2013 Mar 31	By Depreciation A/c	40,000
			2013 Mar 31	By Balance c/d	2,19,250
		2,59,250			2,59,250
2013 Apr 01	To Balance b/d	2,19,250	2014 Mar 31	By Depreciation A/c	40,000
			2014 Mar 31	By Balance c/d	1,79,250
		2,19,250			2,19,250
2014 Apr 01	To Balance b/d	1,79,250	2014 Apr 01	By Bank A/c (Sale of C2)	20,000
2014 Aug 01	To Bank A/c (C4)	80,000	2014 Apr 01	By P&L A/c (Loss on C2)	1,36,250
			2015 Mar 31	By Depreciation A/c	20,333
			2015 Mar 31	By Balance c/d	82,667
		2,59,250			2,59,250
2015 Apr 01	To Balance b/d	82,667

(Note: The textbook answer of ₹83,917 might be due to rounding differences or a slightly different calculation method for the WDV of remaining assets after sale. The method above is standard.)

Q10Numerical Problems

Carriage Transport Company purchased 5 trucks at the cost of ₹ 2,00,000 each on April 01, 2011. The company writes off depreciation @ 20% p.a. on original cost and closes its books on December 31, every year. On October 01, 2013, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay ₹ 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for ₹ 1,00,000 and spent ₹ 20,000 on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2013. Also give truck account if truck disposal account is prepared.

Solution

Working Notes:

Original Trucks (5): Cost = 5 x 2,00,000 = ₹ 10,00,000 (Purchased Apr 01, 2011)
New Truck (1): Cost = 1,00,000 + 20,000 = ₹ 1,20,000 (Purchased Oct 01, 2013)
Annual Depreciation (SLM @ 20%): On one original truck = 2,00,000 x 20% = ₹ 40,000

1. Loss on Destroyed Truck:

Cost of one truck = ₹ 2,00,000
Accumulated Depreciation on this truck till Oct 01, 2013:
- 2011 (9 months: Apr-Dec) = 40,000 x 9/12 = ₹ 30,000
- 2012 (full year) = ₹ 40,000
- 2013 (9 months: Jan-Sep) = 40,000 x 9/12 = ₹ 30,000
- Total Acc. Dep. = ₹ 1,00,000
Book Value on date of accident = 2,00,000 - 1,00,000 = ₹ 1,00,000
Insurance Claim = ₹ 70,000
Loss = 1,00,000 - 70,000 = ₹ 30,000

2. Depreciation for each year:

2011: On 5 trucks for 9 months = (5 x 40,000) x 9/12 = ₹ 1,50,000
2012: On 5 trucks for full year = 5 x 40,000 = ₹ 2,00,000
2013:
- On destroyed truck (9 months) = ₹ 30,000
- On remaining 4 trucks (full year) = 4 x 40,000 = ₹ 1,60,000
- On new truck (3 months: Oct-Dec) = 1,20,000 x 20% x 3/12 = ₹ 6,000
- Total for 2013 = 30,000 + 1,60,000 + 6,000 = ₹ 1,96,000

Dr. Truck Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Apr 01	To Bank A/c	10,00,000	2011 Dec 31	By Balance c/d	10,00,000
		10,00,000			10,00,000
2012 Jan 01	To Balance b/d	10,00,000	2012 Dec 31	By Balance c/d	10,00,000
		10,00,000			10,00,000
2013 Jan 01	To Balance b/d	10,00,000	2013 Oct 01	By Truck Disposal A/c	2,00,000
2013 Oct 01	To Bank A/c	1,20,000	2013 Dec 31	By Balance c/d	9,20,000
		11,20,000			11,20,000

Dr. Provision for Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Dec 31	To Balance c/d	1,50,000	2011 Dec 31	By Depreciation A/c	1,50,000
		1,50,000			1,50,000
2012 Dec 31	To Balance c/d	3,50,000	2012 Jan 01	By Balance b/d	1,50,000
			2012 Dec 31	By Depreciation A/c	2,00,000
		3,50,000			3,50,000
2013 Oct 01	To Truck Disposal A/c	1,00,000	2013 Jan 01	By Balance b/d	3,50,000
2013 Dec 31	To Balance c/d	4,46,000	2013 Dec 31	By Depreciation A/c	1,96,000
		5,46,000			5,46,000

Dr. Truck Disposal Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2013 Oct 01	To Truck A/c	2,00,000	2013 Oct 01	By Prov. for Dep. A/c	1,00,000
			2013 Oct 01	By Bank A/c (Ins. Claim)	70,000
			2013 Oct 01	By P&L A/c (Loss)	30,000
		2,00,000			2,00,000

Q11Numerical Problems

Saraswati Ltd. purchased a machinery costing ₹ 10,00,000 on January 01, 2011. A new machinery was purchased on 01 May, 2012 for ₹ 15,00,000 and another on July 01, 2014 for ₹ 12,00,000. A part of the machinery which originally cost ₹ 2,00,000 in 2011 was sold for ₹ 75,000 on April 30, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year.

Solution

Working Notes:

M1: Cost ₹ 10,00,000 on Jan 01, 2011. (Part sold from this)
M2: Cost ₹ 15,00,000 on May 01, 2012.
M3: Cost ₹ 12,00,000 on Jul 01, 2014.

1. Loss on Sale of Part of M1:

Original Cost of part sold = ₹ 2,00,000.
Annual Dep. on this part = 2,00,000 x 10% = ₹ 20,000.
Accumulated Dep. till Apr 30, 2014:
- 2011, 2012, 2013 (3 full years) = 20,000 x 3 = ₹ 60,000
- 2014 (4 months: Jan-Apr) = 20,000 x 4/12 = ₹ 6,667
- Total Acc. Dep. = ₹ 66,667
Book Value on date of sale = 2,00,000 - 66,667 = ₹ 1,33,333
Sale Price = ₹ 75,000
Loss on Sale = 1,33,333 - 75,000 = ₹ 58,333

2. Depreciation for each year:

2011: On M1 (10,00,000) = ₹ 1,00,000
2012: On M1 (1,00,000) + On M2 for 8 months (15,00,000 x 10% x 8/12 = 1,00,000) = ₹ 2,00,000
2013: On M1 (1,00,000) + On M2 (1,50,000) = ₹ 2,50,000
2014:
- Part of M1 sold (4 months) = ₹ 6,667
- Remaining M1 (8,00,000) for full year = ₹ 80,000
- M2 (15,00,000) for full year = ₹ 1,50,000
- M3 (12,00,000) for 6 months = 12,00,000 x 10% x 6/12 = ₹ 60,000
- Total = ₹ 2,96,667
2015:
- Remaining M1 (8,00,000) = ₹ 80,000
- M2 (15,00,000) = ₹ 1,50,000
- M3 (12,00,000) = ₹ 1,20,000
- Total = ₹ 3,50,000

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Jan 01	To Bank A/c	10,00,000	2011 Dec 31	By Balance c/d	10,00,000
2012 Jan 01	To Balance b/d	10,00,000	2012 Dec 31	By Balance c/d	25,00,000
2012 May 01	To Bank A/c	15,00,000
2013 Jan 01	To Balance b/d	25,00,000	2013 Dec 31	By Balance c/d	25,00,000
2014 Jan 01	To Balance b/d	25,00,000	2014 Apr 30	By Machinery Disp. A/c	2,00,000
2014 Jul 01	To Bank A/c	12,00,000	2014 Dec 31	By Balance c/d	35,00,000
		37,00,000			37,00,000
2015 Jan 01	To Balance b/d	35,00,000	2015 Dec 31	By Balance c/d	35,00,000

Dr. Provision for Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Dec 31	To Balance c/d	1,00,000	2011 Dec 31	By Depreciation A/c	1,00,000
2012 Dec 31	To Balance c/d	3,00,000	2012 Jan 01	By Balance b/d	1,00,000
			2012 Dec 31	By Depreciation A/c	2,00,000
2013 Dec 31	To Balance c/d	5,50,000	2013 Jan 01	By Balance b/d	3,00,000
			2013 Dec 31	By Depreciation A/c	2,50,000
2014 Apr 30	To Machinery Disp. A/c	66,667	2014 Jan 01	By Balance b/d	5,50,000
2014 Dec 31	To Balance c/d	7,80,000	2014 Dec 31	By Depreciation A/c	2,96,667
		8,46,667			8,46,667
2015 Dec 31	To Balance c/d	11,30,000	2015 Jan 01	By Balance b/d	7,80,000
			2015 Dec 31	By Depreciation A/c	3,50,000
		11,30,000			11,30,000

Dr. Machinery Disposal Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Apr 30	To Machinery A/c	2,00,000	2014 Apr 30	By Prov. for Dep. A/c	66,667
			2014 Apr 30	By Bank A/c (Sale)	75,000
			2014 Apr 30	By P&L A/c (Loss)	58,333
		2,00,000			2,00,000

Q12Numerical Problems

On July 01, 2011 Ashwani purchased a machine for ₹ 2,00,000 on credit. Installation expenses ₹ 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be ₹ 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2011 and prepare necessary ledger accounts for first three years.

Solution

Working Notes:

Cost of Machine: Purchase Price ₹ 2,00,000 + Installation ₹ 25,000 = ₹ 2,25,000
Annual Depreciation (SLM): (Cost - Scrap Value) / Life = (2,25,000 - 20,000) / 5 = ₹ 41,000
Depreciation for 2011 (6 months): 41,000 x 6/12 = ₹ 20,500

Journal Entries for the year 2011

Date	Particulars	Debit (₹)	Credit (₹)
2011 Jul 01	Machine A/c Dr.	2,00,000
	To Vendor A/c		2,00,000
	(Being machine purchased on credit)
2011 Jul 01	Machine A/c Dr.	25,000
	To Bank A/c		25,000
	(Being installation expenses paid)
2011 Dec 31	Depreciation A/c Dr.	20,500
	To Machine A/c		20,500
	(Being depreciation charged for 6 months)
2011 Dec 31	Profit & Loss A/c Dr.	20,500
	To Depreciation A/c		20,500
	(Being depreciation transferred to P&L A/c)

Ledger Accounts

Dr. Machine Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Jul 01	To Vendor A/c	2,00,000	2011 Dec 31	By Depreciation A/c	20,500
2011 Jul 01	To Bank A/c	25,000	2011 Dec 31	By Balance c/d	2,04,500
		2,25,000			2,25,000
2012 Jan 01	To Balance b/d	2,04,500	2012 Dec 31	By Depreciation A/c	41,000
			2012 Dec 31	By Balance c/d	1,63,500
		2,04,500			2,04,500
2013 Jan 01	To Balance b/d	1,63,500	2013 Dec 31	By Depreciation A/c	41,000
			2013 Dec 31	By Balance c/d	1,22,500
		1,63,500			1,63,500

Dr. Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Dec 31	To Machine A/c	20,500	2011 Dec 31	By Profit & Loss A/c	20,500
2012 Dec 31	To Machine A/c	41,000	2012 Dec 31	By Profit & Loss A/c	41,000
2013 Dec 31	To Machine A/c	41,000	2013 Dec 31	By Profit & Loss A/c	41,000

Q13Numerical Problems

On October 01, 2010, a Truck was purchased for ₹ 8,00,000 by Laxmi Transport Ltd. Depreciation was provided at 15% p.a. on the diminishing balance basis on this truck. On December 31, 2013 this Truck was sold for ₹ 5,00,000. Accounts are closed on 31st March every year. Prepare a Truck Account for the four years.

Solution

Working Notes:

Depreciation Calculation (WDV @ 15% p.a.):

Year 2010-11 (ending Mar 31, 2011):
- Cost = ₹ 8,00,000
- Depreciation (6 months: Oct-Mar) = 8,00,000 x 15% x 6/12 = ₹ 60,000
- WDV on Apr 01, 2011 = 8,00,000 - 60,000 = ₹ 7,40,000
Year 2011-12 (ending Mar 31, 2012):
- Depreciation (full year) = 7,40,000 x 15% = ₹ 1,11,000
- WDV on Apr 01, 2012 = 7,40,000 - 1,11,000 = ₹ 6,29,000
Year 2012-13 (ending Mar 31, 2013):
- Depreciation (full year) = 6,29,000 x 15% = ₹ 94,350
- WDV on Apr 01, 2013 = 6,29,000 - 94,350 = ₹ 5,34,650
Year 2013-14 (Sale on Dec 31, 2013):
- Depreciation (9 months: Apr-Dec) = 5,34,650 x 15% x 9/12 = ₹ 60,148
- WDV on date of sale = 5,34,650 - 60,148 = ₹ 4,74,502
- Sale Price = ₹ 5,00,000
- Profit on Sale = 5,00,000 - 4,74,502 = ₹ 25,498

Dr. Truck Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010 Oct 01	To Bank A/c	8,00,000	2011 Mar 31	By Depreciation A/c	60,000
			2011 Mar 31	By Balance c/d	7,40,000
		8,00,000			8,00,000
2011 Apr 01	To Balance b/d	7,40,000	2012 Mar 31	By Depreciation A/c	1,11,000
			2012 Mar 31	By Balance c/d	6,29,000
		7,40,000			7,40,000
2012 Apr 01	To Balance b/d	6,29,000	2013 Mar 31	By Depreciation A/c	94,350
			2013 Mar 31	By Balance c/d	5,34,650
		6,29,000			6,29,000
2013 Apr 01	To Balance b/d	5,34,650	2013 Dec 31	By Depreciation A/c	60,148
2013 Dec 31	To P&L A/c (Profit)	25,498	2013 Dec 31	By Bank A/c (Sale)	5,00,000
		5,60,148			5,60,148

(Note: The textbook answer of Profit ₹58,237 seems incorrect based on the provided data and method. The calculation above follows the standard WDV procedure.)

Q14Numerical Problems

Kapil Ltd. purchased a machinery on July 01, 2011 for ₹ 3,50,000. It purchased two additional machines, on April 01, 2012 costing ₹ 1,50,000 and on October 01,2012 costing ₹ 1,00,000. Depreciation is provided @ 10% p.a. on straight line basis. On January 01, 2013, first machinery become useless due to technical changes. This machinery was sold for ₹ 1,00,000. prepare machinery account for 4 years on the basis of calendar year.

Solution

Working Notes:

M1: Cost ₹ 3,50,000 on Jul 01, 2011. Sold on Jan 01, 2013.
M2: Cost ₹ 1,50,000 on Apr 01, 2012.
M3: Cost ₹ 1,00,000 on Oct 01, 2012.

1. Loss on Sale of M1:

Original Cost = ₹ 3,50,000
Annual Dep = 3,50,000 x 10% = ₹ 35,000
Depreciation till Jan 01, 2013:
- 2011 (6 months: Jul-Dec) = 35,000 x 6/12 = ₹ 17,500
- 2012 (full year) = ₹ 35,000
- Total Acc. Dep. = 17,500 + 35,000 = ₹ 52,500
Book Value on date of sale = 3,50,000 - 52,500 = ₹ 2,97,500
Sale Price = ₹ 1,00,000
Loss on Sale = 2,97,500 - 1,00,000 = ₹ 1,97,500

2. Depreciation for each year:

2011: On M1 for 6 months = ₹ 17,500
2012:
- M1 (full year) = ₹ 35,000
- M2 (9 months) = 1,50,000 x 10% x 9/12 = ₹ 11,250
- M3 (3 months) = 1,00,000 x 10% x 3/12 = ₹ 2,500
- Total = ₹ 48,750
2013: (M1 is sold)
- M2 (full year) = 1,50,000 x 10% = ₹ 15,000
- M3 (full year) = 1,00,000 x 10% = ₹ 10,000
- Total = ₹ 25,000
2014: Same as 2013 = ₹ 25,000

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Jul 01	To Bank A/c (M1)	3,50,000	2011 Dec 31	By Depreciation A/c	17,500
			2011 Dec 31	By Balance c/d	3,32,500
		3,50,000			3,50,000
2012 Jan 01	To Balance b/d	3,32,500	2012 Dec 31	By Depreciation A/c	48,750
2012 Apr 01	To Bank A/c (M2)	1,50,000	2012 Dec 31	By Balance c/d	5,36,250
2012 Oct 01	To Bank A/c (M3)	1,00,000
		5,82,500			5,82,500
2013 Jan 01	To Balance b/d	5,36,250	2013 Jan 01	By Bank A/c (Sale)	1,00,000
			2013 Jan 01	By P&L A/c (Loss)	1,97,500
			2013 Dec 31	By Depreciation A/c	25,000
			2013 Dec 31	By Balance c/d	2,13,750
		5,36,250			5,36,250
2014 Jan 01	To Balance b/d	2,13,750	2014 Dec 31	By Depreciation A/c	25,000
			2014 Dec 31	By Balance c/d	1,88,750
		2,13,750			2,13,750
2015 Jan 01	To Balance b/d	1,88,750

Q15Numerical Problems

On January 01, 2011, Satkar Transport Ltd., purchased 3 buses for ₹ 10,00,000 each. On July 01, 2013, one bus was involved in an accident and was completely destroyed and ₹ 7,00,000 were received from the Insurance Company in full settlement. Depreciation is written off @ 15% p.a. on diminishing balance method. Prepare bus account from 2011 to 2014. Books are closed on December 31 every year.

Solution

Working Notes:

1. Depreciation & WDV Calculation:

2011:
- Cost (3 buses) = 30,00,000
- Depreciation = 30,00,000 x 15% = 4,50,000
- WDV on Jan 01, 2012 = 25,50,000 (Each bus: 8,50,000)
2012:
- Depreciation = 25,50,000 x 15% = 3,82,500
- WDV on Jan 01, 2013 = 21,67,500 (Each bus: 7,22,500)

2. Profit/Loss on Destroyed Bus (on Jul 01, 2013):

WDV on Jan 01, 2013 = ₹ 7,22,500
Depreciation for 6 months (Jan-Jun) = 7,22,500 x 15% x 6/12 = ₹ 54,188
WDV on date of accident = 7,22,500 - 54,188 = ₹ 6,68,312
Insurance Claim = ₹ 7,00,000
Profit = 7,00,000 - 6,68,312 = ₹ 31,688

3. Depreciation for 2013:

On destroyed bus (6 months) = ₹ 54,188
On remaining 2 buses (WDV = 2 x 7,22,500 = 14,45,000) for full year = 14,45,000 x 15% = ₹ 2,16,750
Total Dep for 2013 = 54,188 + 2,16,750 = ₹ 2,70,938
WDV of remaining 2 buses on Jan 01, 2014 = 14,45,000 - 2,16,750 = 12,28,250

4. Depreciation for 2014:

On remaining 2 buses = 12,28,250 x 15% = ₹ 1,84,238

Dr. Bus Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Jan 01	To Bank A/c	30,00,000	2011 Dec 31	By Depreciation A/c	4,50,000
			2011 Dec 31	By Balance c/d	25,50,000
		30,00,000			30,00,000
2012 Jan 01	To Balance b/d	25,50,000	2012 Dec 31	By Depreciation A/c	3,82,500
			2012 Dec 31	By Balance c/d	21,67,500
		25,50,000			25,50,000
2013 Jan 01	To Balance b/d	21,67,500	2013 Dec 31	By Depreciation A/c	2,70,938
2013 Jul 01	To P&L A/c (Profit)	31,688	2013 Jul 01	By Bank A/c (Claim)	7,00,000
			2013 Dec 31	By Balance c/d	12,28,250
		21,99,188			21,99,188
2014 Jan 01	To Balance b/d	12,28,250	2014 Dec 31	By Depreciation A/c	1,84,238
			2014 Dec 31	By Balance c/d	10,44,012
		12,28,250			12,28,250
2015 Jan 01	To Balance b/d	10,44,012

Q16Numerical Problems

On October 01, 2011 Juneja Transport Company purchased 2 Trucks for ₹ 10,00,000 each. On July 01, 2013, One Truck was involved in an accident and was completely destroyed and ₹ 6,00,000 were received from the insurance company in full settlement. On December 31, 2013 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for ₹ 1,50,000. On January 31, 2014 company purchased a fresh truck for ₹ 12,00,000. Depreciation is to be provided at 10% p.a. on the written down value every year. The books are closed every year on March 31. Give the truck account from 2011 to 2014.

Solution

Working Notes (WDV @ 10% p.a.):

Truck 1 (T1) & Truck 2 (T2): Cost ₹ 10,00,000 each.

2011-12 (ending Mar 31, 2012):
- Dep on each truck (6 months) = 10,00,000 x 10% x 6/12 = ₹ 50,000
- WDV on Apr 01, 2012 = 9,50,000 each.
2012-13 (ending Mar 31, 2013):
- Dep on each truck = 9,50,000 x 10% = ₹ 95,000
- WDV on Apr 01, 2013 = 8,55,000 each.

1. Loss on T1 (Destroyed Jul 01, 2013):

WDV on Apr 01, 2013 = ₹ 8,55,000
Dep for 3 months (Apr-Jun) = 8,55,000 x 10% x 3/12 = ₹ 21,375
WDV on date of accident = 8,55,000 - 21,375 = ₹ 8,33,625
Insurance Claim = ₹ 6,00,000
Loss on T1 = 8,33,625 - 6,00,000 = ₹ 2,33,625 (Note: Textbook answer might differ)

2. Loss on T2 (Sold Dec 31, 2013):

WDV on Apr 01, 2013 = ₹ 8,55,000
Dep for 9 months (Apr-Dec) = 8,55,000 x 10% x 9/12 = ₹ 64,125
WDV on date of sale = 8,55,000 - 64,125 = ₹ 7,90,875
Sale Price = ₹ 1,50,000
Loss on T2 = 7,90,875 - 1,50,000 = ₹ 6,40,875 (Note: Textbook answer might differ)

3. Depreciation for 2013-14:

On T1 (3 months) = ₹ 21,375
On T2 (9 months) = ₹ 64,125
On New Truck (T3, cost 12,00,000) for 2 months (Feb-Mar) = 12,00,000 x 10% x 2/12 = ₹ 20,000
Total Dep for 2013-14 = 21,375 + 64,125 + 20,000 = ₹ 1,05,500

Dr. Truck Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2011 Oct 01	To Bank A/c	20,00,000	2012 Mar 31	By Depreciation A/c	1,00,000
			2012 Mar 31	By Balance c/d	19,00,000
		20,00,000			20,00,000
2012 Apr 01	To Balance b/d	19,00,000	2013 Mar 31	By Depreciation A/c	1,90,000
			2013 Mar 31	By Balance c/d	17,10,000
		19,00,000			19,00,000
2013 Apr 01	To Balance b/d	17,10,000	2013 Jul 01	By Bank (Claim T1)	6,00,000
2014 Jan 31	To Bank A/c (T3)	12,00,000	2013 Jul 01	By P&L A/c (Loss T1)	2,33,625
			2013 Dec 31	By Bank (Sale T2)	1,50,000
			2013 Dec 31	By P&L A/c (Loss T2)	6,40,875
			2014 Mar 31	By Depreciation A/c	1,05,500
			2014 Mar 31	By Balance c/d	11,80,000
		29,10,000			29,10,000
2014 Apr 01	To Balance b/d	11,80,000

Q17Numerical Problems

A Noida based Construction Company owns 5 cranes and the value of this asset in its books on April 01, 2017 is ₹ 40,00,000. On October 01, 2017 it sold one of its cranes whose value was ₹ 5,00,000 on April 01, 2017 at a 10% profit. On the same day it purchased 2 cranes for ₹ 4,50,000 each. Prepare cranes account. It closes the books on December 31 and provides for depreciation on 10% written down value.

Solution

Working Notes:

1. Profit on Sale of Crane:

WDV on Apr 01, 2017 = ₹ 5,00,000
Depreciation for 6 months (Apr-Sep, as books close Dec 31) = 5,00,000 x 10% x 6/12 = ₹ 25,000
WDV on date of sale (Oct 01, 2017) = 5,00,000 - 25,000 = ₹ 4,75,000
Profit on Sale = 10% of WDV on date of sale = 4,75,000 x 10% = ₹ 47,500
Sale Price = WDV + Profit = 4,75,000 + 47,500 = ₹ 5,22,500

2. Depreciation for the year 2017:

On crane sold (for 6 months) = ₹ 25,000
On remaining cranes:
- WDV on Apr 01, 2017 = 40,00,000 - 5,00,000 = ₹ 35,00,000
- Depreciation for 9 months (Apr-Dec) = 35,00,000 x 10% x 9/12 = ₹ 2,62,500
On new cranes (2 x 4,50,000 = 9,00,000):
- Depreciation for 3 months (Oct-Dec) = 9,00,000 x 10% x 3/12 = ₹ 22,500
Total Depreciation for P&L A/c = 25,000 + 2,62,500 + 22,500 = ₹ 3,10,000

Dr. Cranes Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2017 Apr 01	To Balance b/d	40,00,000	2017 Dec 31	By Depreciation A/c	3,10,000
2017 Oct 01	To Bank A/c (New)	9,00,000	2017 Oct 01	By Bank A/c (Sale)	5,22,500
2017 Oct 01	To P&L A/c (Profit)	47,500	2017 Dec 31	By Balance c/d	41,15,000
		49,47,500			49,47,500
2018 Jan 01	To Balance b/d	41,15,000

Q18Numerical Problems

Shri Krishan Manufacturing Company purchased 10 machines for ₹ 75,000 each on July 01, 2014. On October 01, 2016, one of the machines got destroyed by fire and an insurance claim of ₹ 45,000 was admitted by the company. On the same date another machine is purchased by the company for ₹ 1,25,000. The company writes off 15% p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2014 to 2017.

Solution

Working Notes (WDV @ 15% p.a.):

2014:
- Cost (10 machines) = 10 x 75,000 = 7,50,000
- Dep (6 months) = 7,50,000 x 15% x 6/12 = 56,250
- WDV on Jan 01, 2015 = 6,93,750
2015:
- Dep (full year) = 6,93,750 x 15% = 1,04,063
- WDV on Jan 01, 2016 = 5,89,687
- WDV of one machine = 5,89,687 / 10 = 58,969

1. Loss on Destroyed Machine (on Oct 01, 2016):

WDV of one machine on Jan 01, 2016 = ₹ 58,969
Dep for 9 months (Jan-Sep) = 58,969 x 15% x 9/12 = ₹ 6,634
WDV on date of fire = 58,969 - 6,634 = ₹ 52,335
Insurance Claim = ₹ 45,000
Loss = 52,335 - 45,000 = ₹ 7,335

2. Depreciation for 2016:

On destroyed machine (9 months) = ₹ 6,634
On remaining 9 machines (WDV = 9 x 58,969 = 5,30,721) for full year = 5,30,721 x 15% = ₹ 79,608
On new machine (cost 1,25,000) for 3 months = 1,25,000 x 15% x 3/12 = ₹ 4,688
Total Dep = 6,634 + 79,608 + 4,688 = ₹ 90,930

3. Depreciation for 2017:

WDV of 9 old machines = 5,30,721 - 79,608 = 4,51,113
WDV of new machine = 1,25,000 - 4,688 = 1,20,312
Total WDV on Jan 01, 2017 = 5,71,425
Dep for 2017 = 5,71,425 x 15% = ₹ 85,714

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Jul 01	To Bank A/c	7,50,000	2014 Dec 31	By Depreciation A/c	56,250
			2014 Dec 31	By Balance c/d	6,93,750
		7,50,000			7,50,000
2015 Jan 01	To Balance b/d	6,93,750	2015 Dec 31	By Depreciation A/c	1,04,063
			2015 Dec 31	By Balance c/d	5,89,687
		6,93,750			6,93,750
2016 Jan 01	To Balance b/d	5,89,687	2016 Oct 01	By Bank (Claim)	45,000
2016 Oct 01	To Bank A/c (New)	1,25,000	2016 Oct 01	By P&L A/c (Loss)	7,335
			2016 Dec 31	By Depreciation A/c	90,930
			2016 Dec 31	By Balance c/d	5,71,422
		7,14,687			7,14,687
2017 Jan 01	To Balance b/d	5,71,422	2017 Dec 31	By Depreciation A/c	85,713
			2017 Dec 31	By Balance c/d	4,85,709
		5,71,422			5,71,422
2018 Jan 01	To Balance b/d	4,85,709

Q19Numerical Problems

On January 01, 2014, a Limited Company purchased machinery for ₹ 20,00,000. Depreciation is provided @ 15% p.a. on diminishing balance method. On March 01, 2016, one fourth of machinery was damaged by fire and ₹ 40,000 were received from the insurance company in full settlement. On September 01, 2016 another machinery was purchased by the company for ₹ 15,00,000. Write up the machinery account from 2010 to 2013. Books are closed on December 31, every year.

Solution

(Note: The question asks to prepare the account from 2010 to 2013, but the transactions start from 2014. The solution is prepared for the years 2014, 2015, and 2016 based on the transaction dates.)

Working Notes (WDV @ 15% p.a.):

2014:
- Cost = 20,00,000
- Dep = 20,00,000 x 15% = 3,00,000
- WDV on Jan 01, 2015 = 17,00,000
2015:
- Dep = 17,00,000 x 15% = 2,55,000
- WDV on Jan 01, 2016 = 14,45,000

1. Loss on Damaged Part of Machinery (1/4th):

Original Cost of this part = 20,00,000 / 4 = 5,00,000
WDV of this part on Jan 01, 2016 = 14,45,000 / 4 = 3,61,250
Dep for 2 months (Jan-Feb 2016) = 3,61,250 x 15% x 2/12 = ₹ 9,031
WDV on date of damage (Mar 01, 2016) = 3,61,250 - 9,031 = ₹ 3,52,219
Insurance Claim = ₹ 40,000
Loss = 3,52,219 - 40,000 = ₹ 3,12,219

2. Depreciation for 2016:

On damaged part (2 months) = ₹ 9,031
On remaining 3/4th part (WDV = 10,83,750) for full year = 10,83,750 x 15% = ₹ 1,62,563
On new machine (cost 15,00,000) for 4 months (Sep-Dec) = 15,00,000 x 15% x 4/12 = ₹ 75,000
Total Dep for 2016 = 9,031 + 1,62,563 + 75,000 = ₹ 2,46,594

Dr. Machinery Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014 Jan 01	To Bank A/c	20,00,000	2014 Dec 31	By Depreciation A/c	3,00,000
			2014 Dec 31	By Balance c/d	17,00,000
		20,00,000			20,00,000
2015 Jan 01	To Balance b/d	17,00,000	2015 Dec 31	By Depreciation A/c	2,55,000
			2015 Dec 31	By Balance c/d	14,45,000
		17,00,000			17,00,000
2016 Jan 01	To Balance b/d	14,45,000	2016 Mar 01	By Bank (Claim)	40,000
2016 Sep 01	To Bank A/c (New)	15,00,000	2016 Mar 01	By P&L A/c (Loss)	3,12,219
			2016 Dec 31	By Depreciation A/c	2,46,594
			2016 Dec 31	By Balance c/d	23,46,187
		29,45,000			29,45,000
2017 Jan 01	To Balance b/d	23,46,187

Q20Numerical Problems

A Plant was purchased on 1st July, 2015 at a cost of ₹ 3,00,000 and ₹ 50,000 were spent on its installation. The depreciation is written off at 15% p.a. on the straight line method. The plant was sold for ₹ 1,50,000 on October 01, 2017 and on the same date a new Plant was installed at the cost of ₹ 4,00,000 including purchasing value. The accounts are closed on December 31 every year. Show the machinery account and provision for depreciation account for 3 years.

Solution

Working Notes:

Plant 1 (P1): Cost = 3,00,000 + 50,000 = ₹ 3,50,000 (Purchased Jul 01, 2015)
Plant 2 (P2): Cost = ₹ 4,00,000 (Purchased Oct 01, 2017)
Annual Depreciation on P1 (SLM @ 15%): 3,50,000 x 15% = ₹ 52,500

1. Loss on Sale of P1:

Accumulated Dep. on P1 till Oct 01, 2017:
- 2015 (6 months) = 52,500 x 6/12 = ₹ 26,250
- 2016 (full year) = ₹ 52,500
- 2017 (9 months) = 52,500 x 9/12 = ₹ 39,375
- Total Acc. Dep. = 26,250 + 52,500 + 39,375 = ₹ 1,18,125
Book Value on date of sale = 3,50,000 - 1,18,125 = ₹ 2,31,875
Sale Price = ₹ 1,50,000
Loss on Sale = 2,31,875 - 1,50,000 = ₹ 81,875

2. Depreciation for each year:

2015: On P1 (6 months) = ₹ 26,250
2016: On P1 (full year) = ₹ 52,500
2017:
- On P1 (9 months) = ₹ 39,375
- On P2 (3 months) = 4,00,000 x 15% x 3/12 = ₹ 15,000
- Total Dep for 2017 = 39,375 + 15,000 = ₹ 54,375

Dr. Plant Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Jul 01	To Bank A/c	3,50,000	2015 Dec 31	By Balance c/d	3,50,000
2016 Jan 01	To Balance b/d	3,50,000	2016 Dec 31	By Balance c/d	3,50,000
2017 Jan 01	To Balance b/d	3,50,000	2017 Oct 01	By Plant Disposal A/c	3,50,000
2017 Oct 01	To Bank A/c	4,00,000	2017 Dec 31	By Balance c/d	4,00,000
		7,50,000			7,50,000

Dr. Provision for Depreciation Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2015 Dec 31	To Balance c/d	26,250	2015 Dec 31	By Depreciation A/c	26,250
2016 Dec 31	To Balance c/d	78,750	2016 Jan 01	By Balance b/d	26,250
			2016 Dec 31	By Depreciation A/c	52,500
		78,750			78,750
2017 Oct 01	To Plant Disposal A/c	1,18,125	2017 Jan 01	By Balance b/d	78,750
2017 Dec 31	To Balance c/d	15,000	2017 Dec 31	By Depreciation A/c	54,375
		1,33,125			1,33,125

Dr. Plant Disposal Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2017 Oct 01	To Plant A/c	3,50,000	2017 Oct 01	By Prov. for Dep. A/c	1,18,125
			2017 Oct 01	By Bank A/c (Sale)	1,50,000
			2017 Oct 01	By P&L A/c (Loss)	81,875
		3,50,000			3,50,000

Q21Numerical Problems

An extract of Trial balance from the books of Tahiliani and Sons Enterprises on March 31, 2017 is given below:
Name of the Account Debit Amount ₹ Credit Amount ₹
Sundry debtors. 50,000
Bad debts 6,000
Provision for doubtful debts 4,000
Additional Information: Bad Debts proved bad but not recorded amounted to ₹ 2,000. Provision is to be maintained at 8% of Debtors. Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also show the necessary accounts.

Name of the Account	Debit Amount ₹	Credit Amount ₹
Sundry debtors.	50,000
Bad debts	6,000
Provision for doubtful debts		4,000

Solution

Working Notes:

Total Bad Debts for the year: Already in Trial Balance = ₹ 6,000 Further Bad Debts (unrecorded) = ₹ 2,000 Total Bad Debts to be debited to P&L = ₹ 8,000
Calculation for New Provision: Sundry Debtors as per Trial Balance = ₹ 50,000 Less: Further Bad Debts = ₹ 2,000 Good Debtors for provision calculation = ₹ 48,000 New Provision required @ 8% = 48,000 x 8% = ₹ 3,840
Amount to be debited to Profit & Loss Account: Total Bad Debts = ₹ 8,000 New Provision Required = ₹ 3,840 Less: Existing Provision = (₹ 4,000) Total amount debited to P&L A/c = 8,000 + 3,840 - 4,000 = ₹ 7,840

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2017 Mar 31	Bad Debts A/c Dr.	2,000
	To Sundry Debtors A/c		2,000
	(Being further bad debts written off)
2017 Mar 31	Profit & Loss A/c Dr.	7,840
	To Bad Debts A/c		8,000
	To Provision for Doubtful Debts A/c		(160)
	(Being bad debts and provision adjusted)

(Alternative P&L Entry for clarity)

Date	Particulars	Debit (₹)	Credit (₹)
2017 Mar 31	Profit & Loss A/c Dr.	8,000
	To Bad Debts A/c		8,000
	(Being total bad debts transferred)
2017 Mar 31	Provision for Doubtful Debts A/c Dr.	160
	To Profit & Loss A/c		160
	(Being excess provision written back)

Ledger Accounts

Dr. Bad Debts Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
Mar 31	To Balance b/d	6,000	Mar 31	By Profit & Loss A/c	8,000
Mar 31	To Sundry Debtors A/c	2,000
		8,000			8,000

Dr. Provision for Doubtful Debts Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
Mar 31	To Balance c/d	3,840	Mar 31	By Balance b/d	4,000
Mar 31	To Profit & Loss A/c	160
		4,000			4,000

Q22Numerical Problems

The following information are extract from the Trial Balance of M/s Nisha traders on 31 March 2017. Sundry Debtors 80,500 Bad debts 1,000 Provision for bad debts 5,000 Additional Information Bad Debts ₹ 500 Provision is to be maintained at 2% of Debtors. Prepare bad debts accound, Provision for bad debts account and profit and loss account.

Solution

Working Notes:

Total Bad Debts for the year: Already in Trial Balance = ₹ 1,000 Further Bad Debts (Additional Info) = ₹ 500 Total Bad Debts = ₹ 1,500
Calculation for New Provision: Sundry Debtors = ₹ 80,500 Less: Further Bad Debts = ₹ 500 Good Debtors = ₹ 80,000 New Provision required @ 2% = 80,000 x 2% = ₹ 1,600
Amount to be transferred to/from Profit & Loss Account: Total Bad Debts = ₹ 1,500 New Provision Required = ₹ 1,600 Total Expense = 1,500 + 1,600 = ₹ 3,100 Less: Existing Provision = (₹ 5,000) Net Amount = 3,100 - 5,000 = (₹ 1,900) Since the existing provision is more than the total requirement, ₹ 1,900 will be credited to the Profit & Loss Account.

Ledger Accounts

Dr. Bad Debts Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
Mar 31	To Balance b/d	1,000	Mar 31	By Provision for B.D. A/c	1,500
Mar 31	To Sundry Debtors A/c	500
		1,500			1,500

Dr. Provision for Bad Debts Account Cr.

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
Mar 31	To Bad Debts A/c	1,500	Mar 31	By Balance b/d	5,000
Mar 31	To Balance c/d (New Prov.)	1,600
Mar 31	To Profit & Loss A/c	1,900
		5,000			5,000

Dr. Profit and Loss Account (Extract) Cr.

Particulars	Amount (₹)	Particulars	Amount (₹)
		By Provision for Bad Debts A/c	1,900
		(Excess provision written back)

Q1Questions for Practice

What is 'Depreciation'?

Solution

Depreciation is the permanent, continuing, and gradual shrinkage in the book value of a fixed asset. As an accounting term, it refers to the systematic allocation of the depreciable cost of a tangible fixed asset over its estimated useful life. It represents the portion of the asset's cost that has been consumed or expired during an accounting period due to factors like usage (wear and tear), passage of time (effluxion of time), or becoming outdated (obsolescence). It is treated as a non-cash operating expense and is charged against the revenue of a given period to ascertain the true profit or loss.

Q2Questions for Practice

State briefly the need for providing depreciation.

Solution

The need for providing depreciation arises from the following key considerations:

To Ascertain True Profit or Loss: According to the matching principle, the cost of an asset should be spread over the periods in which it generates revenue. Depreciation is this cost of using the asset, and charging it against revenue ensures the correct profit or loss is calculated.
To Show a True and Fair Financial Position: If depreciation is not charged, assets will be shown at an overvalued amount in the balance sheet. This would not reflect the true financial position of the business.
For Tax Purposes: Depreciation is a deductible expense for income tax purposes. Providing for depreciation helps in correctly calculating the tax liability.
Compliance with Law: Certain laws, like the Companies Act, mandate the charging of depreciation on fixed assets for corporate enterprises.
To Retain Funds for Asset Replacement: By treating depreciation as an expense, the profit available for distribution is reduced. This helps in retaining funds within the business that can be used for the future replacement of the asset.

Q3Questions for Practice

What are the causes of depreciation?

Solution

The main causes of depreciation are:

Wear and Tear due to Use or Passage of Time: This refers to the physical deterioration of an asset due to its use in business operations. Even if an asset is not used, its value can decline simply due to the passage of time and exposure to natural elements like weather, rain, etc.
Obsolescence: An asset may become out-of-date or obsolete even if it is in good physical condition. This can happen due to technological advancements, improvements in production methods, or changes in market demand for the product the asset produces.
Expiration of Legal Rights: Some assets, like patents, copyrights, or leases, have a fixed legal life. Their value declines and eventually becomes zero as the expiry date of the legal right approaches.
Abnormal Factors: The usefulness of an asset can decline due to abnormal events such as accidents, fire, floods, or earthquakes. This results in a permanent, though not gradual, loss in the asset's value.

Q4Questions for Practice

Explain basic factors affecting the amount of depreciation.

Solution

The amount of depreciation to be charged on an asset is determined by three basic factors:

Cost of Asset: This is the original or historical cost of the asset. It includes the purchase price plus all costs necessary to bring the asset to its working condition, such as freight, transit insurance, installation costs, and registration fees. For a second-hand asset, it also includes initial repair costs.
Estimated Useful Life: This is the period over which an asset is expected to be used by the enterprise. It is the economic or commercial life of the asset, which may be shorter than its physical life. The useful life can be expressed in years, production units, or working hours.
Estimated Net Residual Value (Salvage Value): This is the estimated net amount that the enterprise expects to obtain for an asset at the end of its useful life, after deducting the estimated costs of disposal. The total depreciation charged over the asset's life cannot exceed its depreciable cost, which is calculated as: Depreciable Cost = Cost of Asset - Estimated Net Residual Value.

Q5Questions for Practice

Distinguish between straight line method and written down value method of calculating depreciation.

Solution

The main points of distinction between the Straight Line Method (SLM) and the Written Down Value (WDV) Method are as follows:

Basis of Difference	Straight Line Method	Written Down Value Method
1. Basis of Calculation	Depreciation is calculated on the original cost of the asset.	Depreciation is calculated on the book value (written down value) of the asset at the beginning of each year.
2. Amount of Depreciation	The amount of annual depreciation remains fixed and constant throughout the useful life of the asset.	The amount of annual depreciation is highest in the first year and decreases in subsequent years.
3. Value of Asset	The book value of the asset can be reduced to zero or its scrap value.	The book value of the asset can never be reduced to zero.
4. Total Charge to P&L	The total charge (depreciation + repairs) against profit increases in later years, as depreciation is constant but repair costs tend to rise with age.	The total charge (depreciation + repairs) against profit remains more or less uniform, as the decreasing depreciation charge is offset by increasing repair costs.
5. Recognition by Tax Law	This method is generally not recognised by income tax authorities for tax calculation purposes.	This method is recognised by income tax law for allowing depreciation as a deductible expense.
6. Suitability	Suitable for assets with a consistent usage pattern and low repair costs, like leasehold buildings, patents, and trademarks.	Suitable for assets that are affected by technological obsolescence and require higher repairs in later years, like plant, machinery, and vehicles.

Q6Questions for Practice

"In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year". Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.

Solution

The Written Down Value (WDV) Method, also known as the Reducing Balance Method, is suitable in this situation.

Reasoning:

Under the WDV method, the amount of depreciation charged is higher in the initial years and gradually decreases in the later years. Conversely, repair and maintenance expenses are typically lower in the initial years and increase as the asset gets older.

By combining these two opposing trends, the WDV method creates a more or less uniform total charge against the Profit and Loss Account each year. The total burden on profit (Depreciation + Repair Expenses) remains relatively constant throughout the asset's life.

Early Years: High Depreciation + Low Repairs = Moderate Total Charge
Later Years: Low Depreciation + High Repairs = Moderate Total Charge

This avoids increasing the burden on profits in later years, which would happen under the Straight Line Method where a constant depreciation charge combined with increasing repair costs would lead to a rising total charge.

Q7Questions for Practice

What are the effects of depreciation on profit and loss account and balance sheet?

Solution

Depreciation has significant effects on both the profit and loss account and the balance sheet.

Effect on Profit and Loss Account:

Reduction of Profit: Depreciation is treated as a non-cash operating expense. It is debited to the Profit and Loss Account, which reduces the net profit for the accounting period.
Matching of Costs and Revenues: Charging depreciation helps in matching the cost of using a fixed asset with the revenues generated by it during a period, leading to the ascertainment of the true profit or loss.

Effect on Balance Sheet:

Reduction in Book Value of Assets: Depreciation reduces the book value of the fixed asset. In the Balance Sheet, the asset is shown at its cost less the accumulated depreciation to date. This ensures that the asset is not overvalued.
Presentation of True Financial Position: By showing assets at their written down value, the Balance Sheet presents a truer and fairer view of the financial position of the business.

In summary, depreciation reduces profits in the Profit and Loss Account and reduces the book value of fixed assets in the Balance Sheet.

Q8Questions for Practice

Distinguish between 'provision' and 'reserve' .

Solution

The key differences between a 'provision' and a 'reserve' are as follows:

Basis of Difference	Provision	Reserve
1. Nature	It is a charge against profit. It must be made whether the business earns a profit or incurs a loss.	It is an appropriation of profit. It can only be created if the business has earned a profit.
2. Purpose	It is created to meet a known liability or expected loss whose amount cannot be determined with certainty (e.g., provision for doubtful debts, provision for repairs).	It is created to strengthen the financial position of the business, for growth, expansion, or to meet future contingencies (e.g., general reserve, dividend equalisation reserve).
3. Effect on Profit	It is debited to the Profit and Loss Account before calculating net profit. It reduces the reported profit.	It is created from the net profit (or profit available for appropriation) after it has been calculated.
4. Use for Dividend	It cannot be used for the distribution of dividends to shareholders.	A general reserve can be used for dividend distribution.
5. Presentation	It is shown either as a deduction from the concerned asset (e.g., debtors) on the asset side or on the liabilities side along with current liabilities.	It is shown on the liabilities side of the Balance Sheet under the head 'Reserves and Surplus'.

Q9Questions for Practice

Give four examples each of 'provision' and 'reserves'.

Solution

Four examples of 'Provision':

Provision for Doubtful Debts: Created to cover potential losses from customers who may not pay their dues.
Provision for Depreciation: Created to allocate the cost of a fixed asset over its useful life.
Provision for Taxation: Created to meet the expected income tax liability for the current period's profit.
Provision for Repairs and Renewals: Created to provide for the expected cost of repairs and maintenance of fixed assets.

Four examples of 'Reserves':

General Reserve: A reserve created without any specific purpose, which strengthens the overall financial position of the business.
Dividend Equalisation Reserve: A specific reserve created to maintain a stable rate of dividend payout to shareholders over the years.
Debenture Redemption Reserve: A specific reserve created to provide funds for the repayment of debentures at the time of maturity.
Investment Fluctuation Fund: A specific reserve created to cover any decline in the market value of investments.

Q10Questions for Practice

Distinguish between 'revenue reserve' and 'capital reserve'.

Solution

The distinction between 'Revenue Reserve' and 'Capital Reserve' is as follows:

Basis of Difference	Revenue Reserve	Capital Reserve
1. Source of Creation	It is created out of revenue profits, which arise from the normal, regular operating activities of the business. These profits are otherwise available for dividend distribution.	It is created out of capital profits, which do not arise from the normal course of business (e.g., profit on sale of fixed assets, premium on issue of shares). These profits are not normally available for dividend distribution.
2. Purpose	It is created to strengthen the financial position, meet unforeseen contingencies, finance expansion, or for specific operational purposes like dividend equalisation.	It is often created to comply with legal requirements or accounting practices. It is used for specific purposes like writing off capital losses or issuing bonus shares.
3. Usage	A general revenue reserve can be used for any purpose, including the distribution of dividends. A specific revenue reserve is used for its earmarked purpose.	It can only be used for specific purposes as laid down by law or accounting standards. It is generally not available for distribution as cash dividends.
4. Examples	General Reserve, Workmen Compensation Fund, Dividend Equalisation Reserve.	Capital Redemption Reserve, Securities Premium Reserve, Profit on Revaluation of Assets.

Q11Questions for Practice

Give four examples each of 'revenue reserve' and 'capital reserves'.

Solution

Four examples of 'Revenue Reserve':

General Reserve: Created from revenue profits to strengthen the financial position of the business, without any specific purpose.
Dividend Equalisation Reserve: Created to maintain a stable rate of dividend for shareholders.
Investment Fluctuation Fund: Created from revenue profits to meet any fall in the market value of investments.
Debenture Redemption Reserve: Created out of profits available for distribution as dividend, to provide funds for the redemption of debentures.

Four examples of 'Capital Reserves':

Securities Premium Reserve: Arises from the issue of shares or debentures at a premium. It is a capital profit.
Profit on Sale of Fixed Assets: The profit made from selling a fixed asset above its book value is a capital profit and can be transferred to a capital reserve.
Profit on Revaluation of Fixed Assets: The upward revaluation of fixed assets results in a capital profit, which is transferred to a Revaluation Reserve.
Capital Redemption Reserve: Created when a company purchases its own shares out of free reserves or redeems preference shares. It is a statutory capital reserve.

Q12Questions for Practice

Distinguish between 'general reserve' and 'specific reserve'.

Solution

The main differences between a 'General Reserve' and a 'Specific Reserve' are:

Basis of Difference	General Reserve	Specific Reserve
1. Purpose	It is created without any specific purpose. It is meant to strengthen the overall financial soundness of the business.	It is created for a pre-determined, specific purpose.
2. Usage / Utilisation	The management can freely use this reserve for any purpose it deems fit, such as business expansion, meeting unforeseen losses, or distributing dividends. It is also known as a 'free reserve'.	It can only be used for the specific purpose for which it was created. For example, a Debenture Redemption Reserve can only be used for redeeming debentures.
3. Objective	The main objective is to improve the working capital and the general financial health of the company.	The objective is to set aside funds to meet a specific, anticipated future need or liability.
4. Examples	The most common example is simply 'General Reserve'.	Dividend Equalisation Reserve, Debenture Redemption Reserve, Workmen Compensation Fund, Investment Fluctuation Fund.

Q13Questions for Practice

Explain the concept of 'secret reserve'.

Solution

A 'secret reserve' is a type of reserve whose existence and amount are not disclosed in the balance sheet. It results in the understatement of assets and/or overstatement of liabilities, which in turn leads to the understatement of profits and the company's net worth. Consequently, the financial position of the business appears to be weaker than it actually is.

Management can create secret reserves in several ways, including:

Charging excessive depreciation: Charging a higher rate of depreciation than is necessary.
Undervaluation of assets: Valuing assets like stock-in-trade or investments at a price significantly lower than their actual cost or market value.
Charging capital expenditure to the Profit and Loss Account: Treating an expense that should be an asset (e.g., major repairs that extend an asset's life) as a revenue expense.
Making excessive provisions: Creating unnecessarily large provisions for doubtful debts or other contingencies.
Showing a contingent liability as an actual liability.

The creation of secret reserves is generally not considered good accounting practice as it violates the principle of true and fair view. However, within reasonable limits, it is sometimes justified on grounds of financial prudence, as it allows a company to absorb unexpected losses without showing a significant drop in profits.

Q1Test Your Understanding - I

State whether the following statements are true or false: Depreciation is a non-cash expense. Depreciation is also charged on current assets. Depreciation is decline in the market value of tangible fixed assets. The main cause of depreciation is wear and tear caused by its usage. Depreciation must be charged so as to ascertain true profit or loss of the business. Depletion term is used in case of intangible assets. Depreciation provides fund for replacement. When market value of an asset is higher than book value, depreciation is not charged. Depreciation is charged to reduce the value of asset to its market value. If adequate maintenance expenditure is incurred, depreciation need not be charged.

Solution

True. Depreciation is an allocation of cost and does not involve any cash outflow.
False. Depreciation is charged only on fixed assets, not on current assets like stock or debtors.
False. Depreciation is a decline in the book value of tangible fixed assets, not necessarily the market value. It is based on the allocation of cost.
True. Wear and tear from usage is a primary cause of depreciation, along with passage of time and obsolescence.
True. According to the matching principle, the cost of using an asset (depreciation) must be matched against the revenue it helps to generate in a period to determine the true profit or loss.
False. The term depletion is used for the extraction of natural resources (like mines, quarries), while amortisation is used for intangible assets.
True. While depreciation itself is a non-cash expense, by charging it to profits, the amount of profit available for distribution is reduced. This retains funds within the business which can be used for the replacement of assets in the future.
False. Depreciation is a process of cost allocation and must be charged regardless of the asset's market value. It is based on the asset's cost, useful life, and residual value.
False. The purpose of charging depreciation is to allocate the cost of the asset over its useful life, not to reflect its current market value.
False. Maintenance expenditure is a revenue expense incurred to keep the asset in good working condition. Depreciation is a capital expense allocated over time to account for the gradual consumption of the asset's value due to wear and tear, passage of time, or obsolescence, which occurs even with proper maintenance.

Q1Test Your Understanding - II

Basaria Confectioner bought a cold storage plant on July 01, 2014 for ₹1,00,000. Compare the amount of depreciation charged for first three years using: Rate of depreciation @ 10% on original cost basis; Rate of depreciation @ on written down value basis; Also, plot the computed amount of depreciation on a graph.

Solution

The accounting period is assumed to be from April 1 to March 31.

1. Depreciation on Original Cost Basis (Straight Line Method)

Cost of Asset: ₹ 1,00,000
Rate of Depreciation: 10% p.a.
Annual Depreciation: 10% of ₹ 1,00,000 = ₹ 10,000
Year 1 (2014-15): The plant was used for 9 months (July 1, 2014, to March 31, 2015). Depreciation = ₹ 10,000 × (9/12) = ₹ 7,500
Year 2 (2015-16): Full year depreciation. Depreciation = ₹ 10,000
Year 3 (2016-17): Full year depreciation. Depreciation = ₹ 10,000

2. Depreciation on Written Down Value Basis (Reducing Balance Method)

Cost of Asset: ₹ 1,00,000
Rate of Depreciation: 10% p.a.
Year 1 (2014-15): Depreciation for 9 months. Depreciation = ₹ 1,00,000 × 10% × (9/12) = ₹ 7,500 Book Value at end of Year 1 = ₹ 1,00,000 - ₹ 7,500 = ₹ 92,500
Year 2 (2015-16): Depreciation on the written down value. Depreciation = ₹ 92,500 × 10% = ₹ 9,250 Book Value at end of Year 2 = ₹ 92,500 - ₹ 9,250 = ₹ 83,250
Year 3 (2016-17): Depreciation on the new written down value. Depreciation = ₹ 83,250 × 10% = ₹ 8,325

Comparison of Depreciation Amount

Year	Straight Line Method (₹)	Written Down Value Method (₹)
2014-15	7,500	7,500
2015-16	10,000	9,250
2016-17	10,000	8,325

3. Graph Plotting the Amount of Depreciation

A graph would show two lines:

Straight Line Method: A horizontal line at ₹10,000 for Year 2 and Year 3 (after the initial lower amount for Year 1).
Written Down Value Method: A downward sloping curve, starting at ₹7,500 in Year 1, decreasing to ₹9,250 in Year 2, and further down to ₹8,325 in Year 3, indicating that the amount of depreciation reduces each year.

Q1Test Your Understanding - III

I State with reasons whether the following statements are True or False ;

(i)

Making excessive provision for doubtful debits builds up the secret reserve in the business.

(ii)

Capital reserves are normally created out of free or distributable profits.

(iii)

Dividend equalisation reserve is an example of general reserve.

(iv)

General reserve can be used only for some specific purposes.

(v)

'Provision' is a charge against profit.

(vi)

Reserves are created to meet future expenses or losses the amount of which is not certain.

(vii)

Creation of reserve reduces taxable profits of the business.

Solution

I. True or False

(i)

True. A secret reserve is one that is not disclosed in the balance sheet. Making a provision for doubtful debts that is much larger than the expected actual loss understates the profit and the value of debtors, thereby creating a secret reserve.

(ii)

False. Capital reserves are created out of capital profits (e.g., profit on sale of fixed assets, premium on issue of shares), which are generally not available for distribution as dividends. Free or distributable profits (revenue profits) are used to create revenue reserves like the General Reserve.

(iii)

False. Dividend Equalisation Reserve is an example of a Specific Reserve. It is created for the specific purpose of maintaining a stable rate of dividend and can only be used for that purpose.

(iv)

False. A General Reserve is not created for any specific purpose and the management can use it freely for any purpose, such as strengthening the financial position, expansion, or even dividend distribution. It is the specific reserve that can be used only for specific purposes.

(v)

True. A provision is a charge against profit. It is an amount set aside to meet a known liability or a probable loss, the amount of which cannot be determined with exact accuracy. It is debited to the Profit and Loss Account before arriving at the net profit.

(vi)

False. This statement describes a provision. Reserves are appropriations of profit, created to strengthen the financial position of the business or for growth and expansion, not to meet known liabilities or losses.

(vii)

False. A reserve is an appropriation of profit after the net profit has been calculated. It is created out of post-tax profits and therefore has no effect on the calculation of taxable profits. Provisions, being a charge against profit, reduce taxable profits.

Q2Test Your Understanding - III

II Fill in the correct words :

(i)

Depreciation is decline in the value of _______

(ii)

Installation, freight and transport expenses are a part of _______

(iii)

Provision is a _______ against profit.

(iv)

Reserve created for maintaining a stable rate of dividend is termed as _______.

Solution

II. Fill in the correct words

(i)

Depreciation is decline in the value of fixed assets.

(ii)

Installation, freight and transport expenses are a part of the cost of asset (or acquisition cost).

(iii)

Provision is a charge against profit.

(iv)

Reserve created for maintaining a stable rate of dividend is termed as Dividend Equalisation Reserve.

Depreciation, Provisions and ReservesClass 11 Financial Accounting 1 NCERT Solutions

Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

Solution

Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.

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Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

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Explain determinants of the amount of depreciation.

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Name and explain different types of reserves in details.

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What are 'provisions'. How are they created? Give accounting treatment in case of provision for doubtful Debts.

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On April 01, 2010, Bajrang Marbles purchased a Machine for ₹ 1,80,000 and spent ₹ 10,000 on its carriage and ₹ 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be ₹ 20,000.

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Berlia Ltd. Purchased a second hand machine for ₹ 56,000 on July 01, 2015 and spent ₹ 24,000 on its repair and installation and ₹ 5,000 for its carriage. On September 01, 2016, it purchased another machine for ₹ 2,50,000 and spent ₹ 10,000 on its installation.

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What is 'Depreciation'?

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State briefly the need for providing depreciation.

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What are the causes of depreciation?

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Explain basic factors affecting the amount of depreciation.

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Distinguish between straight line method and written down value method of calculating depreciation.

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"In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year". Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.

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What are the effects of depreciation on profit and loss account and balance sheet?

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Distinguish between 'provision' and 'reserve' .

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Give four examples each of 'provision' and 'reserves'.

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Distinguish between 'revenue reserve' and 'capital reserve'.

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Give four examples each of 'revenue reserve' and 'capital reserves'.

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Distinguish between 'general reserve' and 'specific reserve'.

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Explain the concept of 'secret reserve'.

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I State with reasons whether the following statements are True or False ;

Making excessive provision for doubtful debits builds up the secret reserve in the business.

Capital reserves are normally created out of free or distributable profits.

Dividend equalisation reserve is an example of general reserve.

General reserve can be used only for some specific purposes.

'Provision' is a charge against profit.

Reserves are created to meet future expenses or losses the amount of which is not certain.

Creation of reserve reduces taxable profits of the business.

Solution

II Fill in the correct words :

Depreciation is decline in the value of _______

Installation, freight and transport expenses are a part of _______

Provision is a _______ against profit.

Reserve created for maintaining a stable rate of dividend is termed as _______.

Solution