Concept and Accounting of Depreciation

Concept and Accounting for Depreciation

Introduction –
 Property, plant and equipment are tangible items that:
o are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
o are expected to be used during more than a period of twelve months.
 These are also called fixed assets in common parlance.
 When a fixed asset is purchased, it is recorded in books of account at it original or acquisition/purchase cost.
 Fixed assets are used to earn revenues for a number of accounting periods in future with the same acquisition
cost until the concerned fixed asset is sold or discarded. It is therefore necessary that a part of the acquisition
cost of the fixed assets is treated or allocated as an expense in each of the accounting period in which the asset
is utilized.
 The amount or value of fixed assets allocated in such manner to respective accounting period is called
depreciation. Value of such assets decreases with passage of time mainly due to following reasons.
o Wear and tear due to its use in business
o Efflux of time even when it is not being used
o Obsolescence due to technological or other changes
o Decrease in market value
o Depletion mainly in case of mines and other natural reserves
 It is important to account for value of portion of property, plant and equipment utilized for generating revenue
during an accounting year to ascertain true income. This portion of cost of Property, Plant & Equipment
allocated to an accounting year is called depreciation.
 As per Schedule II under the Companies Act, 2013, Depreciation is the “systematic allocation of the depreciable
amount of an asset over its useful life”.
 The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual
value.
 The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the
number of production or similar units expected to be obtained from the asset by the entity.
 Thus, there are 3 important factors for computing depreciation:
o Estimated useful life of the asset
o Cost of the asset
o Residual value of the asset at the end of the of its estimated useful life
 Depreciation of an asset begins when it is available for use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management. Thus, it is not necessary that
an asset must be used to be depreciated. There is decrease in value of assets due to normal wear and tear even
when these are not physically used. Accordingly, value of such wear and tear should be estimated and accounted
for.
 Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period
during the expected useful life of the asset.
 The loss in the value of assets employed for carrying on a business being an essential element of business
expenditure, it is necessary to calculate the amount of such loss and to make a provision, and therefore, arrive
at the amount of profit or loss made by the business.
 The amount to be written off in each year should be as such which will reduce the book value of the asset, at the
end of its economic life, to its estimated scrap value.

Depreciation on components of an assets:

 It may be noted that Accounting Standards as well as the Companies Act, 2013 requires depreciation to be
charged on a component basis.
 Each part of an item of Property, Plant and Equipment with a cost that is significant in relation to the total cost
of the item should be depreciated separately.
Bhagwati Education Institute Page 1
 Concept and Accounting of Depreciation

 An enterprise should allocate the amount initially recognized in respect of an item of property, plant and
equipment to its significant parts/components and should depreciate each such part separately based on the
useful life and residual value of each particular component. For Example: The airframe (i.e. the body of the
aircraft), the engines and the interiors have different individual useful lives. If the life of the airframe (being
the longest of the individual lives of the three major types of components) is taken as the life of the aircraft, it
is important that other two major components i.e. engine and interiors are depreciated over their respective
useful life and not over the life of airframe. Other components (usually small and low value) which will require
replacement very frequently may be depreciated over the useful life of airframe and their frequent
replacement cost may be charged to expense as and when it is incurred.
 Here it is important to note that a part of Property, Plant & Equipment to be identified as a separate component
should have both –
o significant cost when compared to overall cost of item of property, plant and equipment and
o estimated useful life or depreciation method different from rest of the parts of the property plant and
equipment.
 A significant part of an item of property, plant and equipment may have a useful life and a depreciation method
that are the same as the useful life and the depreciation method of another significant part of that same item.
Such parts may be grouped in determining the depreciation charge.

Objectives for providing Depreciation:

Prime objectives for providing depreciation are:
 Correct income measurement: Depreciation should be charged for proper estimation of periodic profit or loss.
In case an enterprise does not account for depreciation on Property, Plant & Equipment, it will not be
considering loss in value of property, plant & equipment due to their use in production or operations of the
enterprise and will not result in true profit or loss for the period.
 True position statement: Value of the Property, Plant & Equipment should be adjusted for depreciation charged
in order to depict the actual financial position. In case depreciation is not accounted for appropriately, the
property, plant and equipment would be disclosed in financial statements at a value higher than their true value.
 Funds for replacement: Generation of adequate funds in the hands of the business for replacement of the asset
at the end of its useful life. Depreciation is a good indication of the amount an enterprise should set aside to
replace a fixed asset after its economic useful life is over. However, the replacement cost of a fixed asset may be
impacted by inflation or other technological changes.
 Ascertainment of true cost of production: For ascertaining the cost of the production, it is necessary to charge
depreciation as an item of cost of production.

 Further depreciation is a non-cash expense and unlike other normal expenditure (e.g. wages, rent,
etc.) does not result in any cash outflow.
 Further depreciation by itself does not create funds it merely draws attention to the fact that out of
gross revenue receipts, a certain amount should be retained for replacement of assets used for
carrying on operation.

Factors in measurement of Depreciation – Estimation of exact amount of depreciation is not easy. Generally
following factors are taken into consideration for calculation of depreciation.
 Cost of asset including expenses for installation, commissioning, trial run etc. – Cost of a depreciable asset
represents its money outlay or its equivalent in connection with its acquisition, installation and commissioning
as well as for additions to or improvement thereof for the purpose of increase in efficiency.
 Estimated useful life of the asset – Determination of the useful life is a matter of estimation and is normally
based on various factors including experience with similar type of assets. Several other factors like estimated
working hours, production capacity, repairs and renewals, etc. are also taken into consideration on demanding
situation.

Bhagwati Education Institute Page 2

 Concept and Accounting of Depreciation

‘Useful Life’ is either:

o the period over which a depreciable asset is expected to be used by the enterprise or
o the number of production or similar units expected to be obtained from the use of the asset by the
enterprise.
 Estimated scrap value (if any) at the end of useful life of the asset – Determination of the residual value is
normally a difficult matter. If such value is considered as insignificant, it is normally regarded as nil. On the
other hand, if the residual value is likely to be significant, it is estimated at the time of acquisition/ installation,
or at the time of subsequent revaluation of asset.

Depreciable amount of a depreciable asset is its historical cost in the financial statements, less the estimated residual
value.

Cost of Property, Plant and Equipment comprises:

a) its purchase price, including non-refundable import duties and purchase taxes, after deducting trade discounts
and rebates.
b) any cost directly attributable to bring the asset to the location and condition necessary for it to be capable of
operating in a manner intended by the enterprise. Examples are –
a. cost of employee benefits arising directly from acquisition or construction of an item of property, plant
and equipment.
b. cost of site preparation
c. initial delivery and handling costs
d. installation and assembly costs
e. cost of testing whether the asset is functioning properly, after deducting the net proceeds from selling
the items produced while testing (such as samples produced while testing)
f. professional fees e.g. engineers hired for helping in installation of a machine
However, following expenses should not become part of cost of asset:
i. costs of opening new facility or business, such as inauguration costs;
ii. cost of introducing new product or service (for example cost of advertisement or promotional activities).
iii. cost of conducting business in a new location or with a new class of customer (including cost of staff
training); and
iv. administration and other general overhead costs.
c) the initial estimate of the costs of dismantling, removing, the item and restoring the site on which an asset is
located.
 Once an asset has been brought to its intended condition and location of use, no cost should be
recognized as part of cost of the asset unless there is major repair or addition which increases the
useful life of the asset or improves the production capacity of the asset.
 Cost incurred while and item is capable of operating in intended manner but it is not yet put to use
or is used at less than full capacity should not be capitalized as part of cost of the asset.
 Cost of relocation of an asset should not be capitalized.
 Any additions made to a particular item of property, plant and equipment after it is initially put to
use are depreciated over the remaining useful life of the asset.
Therefore, it is important to maintain an asset register capturing asset wise details of cost, rate of
depreciation, date of capitalization etc. All these details need to be captured for any additions to existing
assets as well. In the absence of the adequate information, it will be very difficult to compute depreciation
expense year on year. Also, at the time of disposal or discard of a particular asset, it will not be possible
to compute gain or loss on such disposal/discard.

Bhagwati Education Institute Page 3

 Concept and Accounting of Depreciation

Methods for providing Depreciation –

 Methods for providing depreciation are based on formula, developed on a study of the behaviour of the assets
over a period of years for readily computing the amount of depreciation suffered by different forms of assets.
 Each of the methods, however, should be applied only after carefully considering nature of the asset and the
conditions under which it is being used.
 The Income Tax Rules, however, prescribe the Diminishing Balance Method except in the case of assets of an
undertaking engaged in generation and distribution of power.

1. Straight Line Method:

 According to this method, an equal amount is written off every year during the working life of an asset so as
to reduce the cost of the asset to nil or its residual value at the end of its useful life.
 The advantage of this method is that it is simple to apply and gives accurate results especially in case of leases,
and also in case of plant and machinery.
 This method is also known as Fixed Instalment Method.

Straight Line Depreciation = Cost of Asset – Scrap Value

Useful life

Straight Line Depreciation Rate = Straight Line Depreciation x 100

Cost of Asset

 The underlying assumption of this method is that the particular tangible asset generates equal utility during
its lifetime. But this cannot be true under all circumstances.
 The expenditure incurred on repairs and maintenance will be low in earlier years, whereas the same will be high
as the asset becomes old.
 The asset may also have varying capacities over the years, indicating logic for unequal depreciation provision.
 However, many assets have insignificant repairs and maintenance expenditures for which straight line method
can be applied.
 While using this method the period of use of an asset in a particular year should also be considered. In the year
of purchase of an asset it may have been available for use for part of the year only, accordingly depreciation
should be proportioned to reflect the period for which it was available for use. For example, if an asset was
purchased on March 1, 2017 and the enterprise prepares financial statements for the year ending on March
31, 2017 depreciation will be provided for a period of 1 month only. Similar situation will arise in the year in
which an asset is retired from its intended used or is sold. However, under income tax rules depreciation is
provided for full year if the asset was used for more than 180 days in a particular financial year.

2. Reducing or Diminishing Balance Method:

 Under this system, a fixed percentage of the diminishing value of the asset is written off each year so as to
reduce the asset to its residual value at the end of its life.
 Repairs and small renewals are charged to revenue.
 This method is commonly used for plant, fixtures, etc.
 Under this method, the annual charge for depreciation decreases from year to year, so that the earlier years
suffer to the benefit of the later years. Also, under this method, the value of asset can never be completely
extinguished, which happens in the earlier explained Straight Line Method. However, it is very simple to
operate.
 This method is based on the assumption that cost of repairs will increase as the asset get old, therefore,
depreciation in earlier years should be high when the repair cost is expected to be low and depreciation in later
years should be low when the repair cost is expected to be high. Therefore, this method will result in almost
equal burden in all the years of use of the asset as depreciation will reduce with increase in repair costs will
increase with every passing year.

Bhagwati Education Institute Page 4

 Concept and Accounting of Depreciation

 On the other hand, under the Straight-Line Method, the charge for depreciation is constant, while repairs tend
to increase with the life of the asset. Among the disadvantages of this method is the danger that too low a
percentage may be adopted as depreciation with the result that over the life of the asset full depreciation may
not be provided; also if assets are grouped in such a way that individual assets are difficult to identify, the residue
of an asset may lie in the asset account even after the asset has been scrapped.
 The last-mentioned difficulty could be, however, overcome if a Plant register is maintained.
 The rate of depreciation under this method may be determined by the following formula:

 Similar to straight line method, in this method also period of use in a particular year e.g. year of purchase or
sale an item of property plant and equipment needs to be considered while computing the depreciation amount.

Accounting Entries under Straight Line and Reducing Balance Methods: There are two alternative
approaches for recording accounting entries for depreciation.

First Alternative: A provision for depreciation account is opened to accumulate the balance of depreciation and the
assets are carried at historical cost.
Accounting entry is as under:
Depreciation Account Dr.
To Provision for Depreciation Account
Profit and Loss Account Dr.
To Depreciation Account

Second Alternative: Amount of Depreciation is credited to the Asset Account every year and the Asset Account is
carried at historical cost less depreciation.
Accounting entries are as under:
Depreciation Account Dr.
To Asset Account
Profit and Loss Account Dr.
To Depreciation Account

Example 1 – Jain Bros. acquired a machine on 1st July, 2015 at a cost of Rs. 14,00,000 and spent Rs. 1,00,000 on its
installation. The firm writes off depreciation at 10% p.a. of the original cost every year. The books are closed on 31st
December every year.
Required: Show the Machinery Account and Depreciation Account for the year 2015 and 2016.
Machinery Account

Example 2 – Jain Bros. acquired a machine on 1st July, 2015 at a cost of Rs. 14,00,000 and spent Rs. 1,00,000 on its
installation. The firm writes off depreciation at 10% p.a. every year. The books are closed on 31st December every year.
Required: Show the Machinery Account on diminishing balance method for the year 2015 and 2016.

Bhagwati Education Institute Page 5

 Concept and Accounting of Depreciation

3. Sum of Years of Digits Method:

 It is variation of the “Reducing Balance Method”.
 In this case, the annual depreciation is calculated by multiplying “the original cost of the asset” less “its
estimated scrap value” by the fraction represented by:
The number of years (including the present year) of remaining life of the asset
Total of all digits of the life of the asset (in years)

Example: Suppose the estimated life of an asset is 10 years; the total of all the digits from 1 to 10 is 55 i.e., 10 +
9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1, or by the formula:

The depreciation to be written off in the

- first year will be 10/55 of the cost of the asset less estimated scrap value; and
- second year will be 9/55 of the cost of asset less estimated scrap value and so on.
 The method is not yet in vogue; and its advantages are the same as those of the Reducing Balance Method.

Example 3 – M/s Akash purchased a machine for Rs. 10,00,000. Estimated useful life and scrap value were 10 years
and Rs. 1,20,000 respectively. The machine was put to use on 1.1.2010.
Required: Show Machinery Account and Depreciation Account in their books for 2015 by using sum of years digits
method.

4. Machine Hour Method –

 Where it is practicable to keep a record of the actual running hours of each machine, depreciation may be
calculated on the basis of hours that the concerned machine worked.
 The machine hour rate of the depreciation, is calculated after estimating the total number of hours that machine
would work during its whole life; however, it may have to be varied from time to time, on a consideration of the
changes in the economic and technological conditions which might take place, to ensure that the amount
provided for depreciation corresponds to that considered appropriate in the changed circumstances.
 It would be observed that the method is only a slight variation of the Straight-Line Method under which
depreciation is calculated per year.
 Under this method it is calculated for each hour the machine works.
 Schedule II to the Companies Act 2013, prescribes estimated useful life of different assets for companies, also
recognizes this method to some extent. It prescribes that depreciation should be charged using estimate useful
life suggested in it, however, in certain category of plant and machinery it prescribes to charge higher amount
of depreciation if these assets are used for 2 shifts or 3 shifts. In a way, schedule II combines straight line method
and machine hour method.

Example 4 – A machine was purchased for Rs. 30,00,000 having an estimated total working of 24,000 hours. The
scrap value is expected to be Rs. 2,00,000 and anticipated pattern of distribution of effective hours is as follows:
Year
1 – 3 3,000 hours per year
4-6 2,600 hours per year
7 - 10 1,800 hours per year
Required: Determine Annual Depreciation under Machine Hour Rate Method.

Bhagwati Education Institute Page 6

 Concept and Accounting of Depreciation

5. Production Units Method –

 Under this method depreciation of the asset is determined by comparing the annual production with the
estimated total production.
 The amount of depreciation is computed by the use of following method:
Depreciation for the period = Depreciable Amount × Production during the period
Estimated total production

 The method is applicable to machines producing product of uniform specifications.

Example 5 – A machine is purchased for Rs. 20,00,000. Its estimated useful life is 10 years with a residual value of
Rs. 2,00,000. The machine is expected to produce 1,50,000 units during its life time. Expected distribution pattern of
production is as follows:

Year Production
1-3 20,000 units per year
4-7 15,000 units per year
8-10 10,000 units per year
Required: Determine the value of depreciation for each year using production units method.

6. Depletion Method –
 This method is used in case of mines, quarries etc. containing only a certain quantity of product.
 The depreciation rate is calculated by dividing the cost of the asset by the estimated quantity of product likely
to be available.
 Annual depreciation will be the quantity extracted multiplied by the rate per unit.

Example 6 – M/s Surya took lease of a quarry on 1-1-2013 for Rs. 1,00,00,000. As per technical estimate the total
quantity of mineral deposit is 2,00,000 tonnes. Depreciation was charged on the basis of depletion method. Extraction
pattern is given in the following table:
Year Quantity of Mineral extracted
2013 2,000 tonnes
2014 10,000 tonnes
2015 15,000 tonnes
Required: Show the Quarry Lease Account and Depreciation Account for each year from 2013 to 2015.
[MTP – Oct 2018, MTP – Oct 2019 (10 marks)]

Profits or Loss on the sale/disposal of Property, Plant and Equipment –

 Whenever any depreciable asset is sold during the year, depreciation is charged on it for the period it has been
used in the sale year.
 The written down value after charging such depreciation is used for calculating the profit or loss on the sale of
that asset.
 The resulting profit or loss on sale of the asset is ultimately transferred to profit and loss account.
For example: The book value of the asset as on 1st January, 2015 is Rs. 50,00,000. Depreciation is charged on
the asset @10%. On 1st July 2015, the asset is sold for Rs. 32,00,000.

Example 7– A firm purchased on 1st January, 2015 certain machinery for Rs. 5,82,000 and spent Rs. 18,000 on its
erection. On July 1, 2015 another machinery for Rs. 2,00,000 was acquired. On 1st July, 2016 the machinery purchased
on 1st January, 2015 having become obsolete was auctioned for Rs. 3,86,000 and on the same date fresh machinery was
purchased at a cost of Rs. 4,00,000. Depreciation was provided for annually on 31st December at the rate of 10 per cent
p.a. on written down value. Required: Prepare machinery account.

Bhagwati Education Institute Page 7

 Concept and Accounting of Depreciation

Change in the Method of Depreciation –

 The depreciation method applied to an asset should be reviewed at least at each financial year-end and, if there
has been a significant change in the expected pattern of consumption of the future economic benefits embodied
in the asset, the method should be changed to reflect the changed pattern.
 Whenever any change in depreciation method is made. Such change in method is treated as change in
accounting estimate as per Accounting Standards.
 Its effect needs to be quantified and disclosed.
 A change in an accounting estimate may affect the current period only or both the current period and future
periods.

Example –
Cost of Machine Rs. 10,50,000
Residual Value Rs. 50,000
Useful life 10 years.
The company charges depreciation on straight line method for the first two years and thereafter decides to adopt
written down value method by charging depreciation @ 25%. (calculated based on useful life). You are required
to calculate depreciation for the 3rd year.
Solution – Depreciation already charged for the first 2 years as per straight line method is Rs. 2,00,000.
Therefore, WDV for 2nd year is Rs. 8,50,000. Therefore, in the profit and loss account of the 3rd year, the
depreciation of Rs. 2,12,500 (25% of Rs. 850,000) should be debited.

Example 8 – M/s Anshul commenced business on 1st January 2011, when they purchased plant and equipment for Rs.
7,00,000. They adopted a policy of charging depreciation at 15% per annum on diminishing balance basis and over the
years, their purchases of plant have been:
Date Amount
1-1-2012 1,50,000
1-1-2015 2,00,000
On 1-1-2015 it was decided to change the method and rate of depreciation to straight line basis. On this date remaining
useful life was assessed as 6 years for all the assets purchased before 1.1.2015 and 10 years for the asset purchased on
1.1.2015 with no scrap value.
Required: Calculate the difference in depreciation to be adjusted in the Plant and Equipment Account for the year ending
31st December, 2015.

Revision of the estimated useful life of Property, Plant and Equipment –

 The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if
expectations differ from previous estimates, the change(s) should be accounted for as a change in an accounting
estimate in accordance with Accounting Standards.
 Whenever there is a revision in the estimated useful life of the asset, the unamortized depreciable amount should
be charged over the revised remaining estimated useful life of the asset.

Example 9 – A Machine costing Rs. 6,00,000 is depreciated on straight line basis, assuming 10 years working life and
Nil residual value, for three years. The estimate of remaining useful life after third year was reassessed at 5 years.
Required: Calculate depreciation for the fourth year.

Revaluation of Property, Plant and Equipment –

 If there is an upward revision in the value of asset for the first time, then the amount of appreciation is debited
to Asset Account and credited to Revaluation Reserve Account.
Bhagwati Education Institute Page 8
 Concept and Accounting of Depreciation

 If there is downward revision in the value of asset then Profit and Loss Account is debited and Asset Account is
credited.
 If an asset was earlier revalued downward and later on revalued upward then the appreciation to the extent of
earlier downfall is credited to profit and loss account.
 If an asset was earlier revalued upward and then later on it was revalued downward then the downfall to the
extent of earlier appreciation is debited to Revaluation Reserve Account.
 In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed
separately in the year in which revaluation is carried out.

Example 10 – A machine of cost Rs. 12,00,000 is depreciated straight-line assuming 10 year working life and zero
residual value for three years. At the end of third year, the machine was revalued upwards by Rs. 60,000 the remaining
useful life was reassessed at 9 years.
Required: Calculate depreciation for the fourth year.

Bhagwati Education Institute Page 9

 Concept and Accounting of Depreciation

Exercise

1. A firm’s plant and machinery account at 31st December, 2015 and the corresponding depreciation provision
account, broken down by year of purchase are as follows:
`

Year of Purchase Plant and Machinery at cost Depreciation provision

1998 2,00,000 2,00,000
2004 3,00,000 3,00,000
2005 10,00,000 9,50,000
2006 7,00,000 5,95,000
2013 5,00,000 75,000
2014 3,00,000 15,000
Rs. 30,00,000 Rs. 21,35,000

Depreciation is at the rate of 10% per annum on cost. It is the Company’s policy to assume that all purchases,
sales or disposal of plant occurred on 30th June in the relevant year for the purpose of calculating depreciation,
irrespective of the precise date on which these events occurred.
During 2015 the following transactions took place:
1. Purchase of plant and machinery amounted to Rs. 15,00,000
2. Plant that had been bought in 2004 for Rs. 170,000 was scrapped.
3. Plant that had been bought in 2005 for Rs. 90,000 was sold for Rs. 5,000.
4. Plant that had been bought in 2006 for Rs. 2,40,000 was sold for Rs. 15,000.
Required: Calculate the provision for depreciation of plant and machinery for the year ended 31st December,
2015. In calculating this provision, you should bear in mind that it is the company’s policy to show any profit or
loss on the sale or disposal of plant as a completely separate item in the Profit and Loss Account. You are also
required to prepare the following ledger accounts during 2015.
i. Plant and machinery at cost;
ii. Depreciation provision;
iii. Sales or disposal of plant and machinery.

2. The Machinery Account of a Factory showed a balance of Rs. 19,00,000 on 1st January, 2015. Its accounts were
made up on 31st December each year and depreciation is written off at 10% p.a. under the Diminishing Balance
Method.
On 1st June 2015, a new machinery was acquired at a cost of Rs. 2,80,000 and installation charges incurred in
erecting the machine works out to Rs. 8,920 on the same date. On 1st June, 2015 a machine which had cost Rs.
4,37,400 on 1st January 2013 was sold for Rs. 75,000. Another machine which had cost Rs. 4,37,000 on 1st
January, 2014 was scrapped on the same date and it realized nothing.
Write a plant and machinery account for the year 2015, allowing the same rate of depreciation as in the past
calculating depreciation to the nearest multiple of a Rupee.

3. The LG Transport company purchased 10 trucks at Rs. 45,00,000 each on 1st April 2014. On October 1st, 2016,
one of the trucks is involved in an accident and is completely destroyed and Rs. 27,00,000 is received from the
insurance in full settlement. On the same date another truck is purchased by the company for the sum of Rs.
50,00,000. The company write off 20% on the original cost per annum. The company observe the calendar year
as its financial year. Give the motor truck account for two year ending 31 Dec, 2017.
[MTP – August, 2018 (10 marks)]

4. A Machinery costing - 20,00,000 is depreciated on straight line assuming 10 years working life and nil salvage
value for four years. At the end of the fourth year, the machinery was revalued upwards by 80,000. The
remaining useful life of the machinery was also reassessed as 8 years at the end of the
fourth year. Calculate the depreciation for 5th Year.
Bhagwati Education Institute Page 10
 Concept and Accounting of Depreciation

5. Amazing group had Property, Plant & Equipment (PP&E) with a book value of - 35,00,000 on 31 st December
2019. The balance in Revaluation Surplus on that date was - 3,00,000. As part of their practice of revaluing the
assets on yearly basis, another revaluation was carried out on 31st December 2019.
Evaluate the impact of Revaluation if the Fair Value as a result of Revaluation done on 31st December 2019 was
(a) - 37,00,000 (b) - 33,00,000 and (c) - 31,00,000. Also, give the journal entries.

6. Radhe Ltd. purchased a machine on 01-04-2013 for Rs. 3,00,000, having useful life of 3 years with estimated
scrap value of Rs. 30,000. Company follows straight line method for providing depreciation and closes its
accounts of 31st March every year. Show the necessary ledger accounts if asset was sold by company for Rs.
15,000 at the end of useful life when,
a. Provision for Depreciation Account is not maintained.
b. Provision for Depreciation Account is maintained.

7. On 1st April, 2014, Ajanta Ltd. purchased 2 machinery for Rs. 7,60,000 and Rs. 40,000 respectively. On 30th
September, 2016, machinery purchased for Rs. 40,000 was sold for Rs. 22,500 and new machinery at a cost of
Rs. 79,000 was purchased and installed on the same date. The Company has adopted the method of providing
10% p.a. depreciation on the original cost of the machinery. Assume company follows financial year as
accounting year.
Required: Show the necessary ledger accounts assuming that
a. Provision for Depreciation Account is not maintained.
b. Provision for Depreciation Account is maintained.

8. On 1st April 2014, Ajay Ltd. purchased a second hand machine for Rs. 1,00,000 and spent Rs. 20,000 on its
cartage, repairs and installation. The residual value at the end of its expected useful life of 4 years is estimated
at Rs. 20,000. On 30th Sept. 2016, repairs and renewals amounted to Rs. 2,000. Depreciation is to be provided
according to Straight Line Method.
Required: Prepare Machinery Account and Depreciation Account for the first three years if the accounts are
closed on 31st March each year.

9. On 1st January 2016, Sujata Ltd. purchased a second hand machine for Rs. 90,000 and spent Rs. 10,000 on its
cartage, repairs and installation. The residual value at the end of its expected useful life of 4 years is estimated
at Rs. 4,000. On 30th September 2016, repairs and renewals amounted to Rs. 2,000. On 30th Sept. 2018, this
machine was sold for Rs. 5,000. Depreciation is to be provided according to Straight Line Method.
Required: Prepare Machinery Account for the first three years if the accounts are closed on 31st March each
year.

10. On 1st April 2014, Ahmedabad transport Ltd. purchased a second hand machine for Rs. 90,000 and spent Rs.
10,000 on its cartage, repairs and installation. Estimated scrap value at the end of useful life is Rs. 12,000 On
30th June 2015, repairs and renewals amounted to Rs. 1,000. Depreciation is to be provided at 20% p.a.
according to written down value method.
Required: Prepare Machinery Account and Depreciation Account for the first three years if the accounts are
closed on 31st March each year.
What would be change in your answer if accounts are closed on 31 st December every
year.

11. On 1st January, 2014 Sahara sports Ltd. purchased a second hand machine for Rs. 40,000 and spent Rs. 10,000
on its cartage, repairs and installation. On 30th Sept. 2016, repairs and renewals amounted to Rs. 2,000. On
30th Sept. 2017, this machine was sold for Rs. 25,000. Depreciation is to be provided @ 20% p.a. according to
Written Down Value Method. Required: Prepare Machinery Account assuming that

Bhagwati Education Institute Page 11

 Concept and Accounting of Depreciation

a. The accounts are closed on 31st March each year.

b. The accounts are closed on 31st December each year.
c. The accounts are closed on 30th September each year.

12. On 1st April 2015, Raj Ltd. purchased machinery for Rs. 1,50,000 and incurred Rs. 8,500 towards freight and
insurance, Rs. 500 towards carriage inwards and Rs. 1,000 towards installation charges. It was established that
the machinery will have a scrap value of Rs. 5,000 at the end of its useful life, which is 4 years. On 1st April,
2016, Rs. 1,000 was spent on repairs and renewals of the machine.
You are required to:
a. Calculate the amount of Depreciation for each year
b. Calculated the rate of Depreciation for each year
c. Show the Machinery Account for the first four financial years ending on 31st March each year
accounting to the Sum of Year's Digits Method.

13. On 1st April 2015, Raj Ltd. purchased machinery for Rs. 10,000 and incurred Rs. 6,500 towards freight and
insurance, Rs. 500 towards carriage inwards and Rs. 1,000 towards installation charges. It was established that
the machinery will have a scrap value of Rs. 3,000 at the end of its useful life, which is 4 years. On 1st April,2016,
Rs. 1,000 was spent on repairs and renewals of the machine. Calculate book value of asset at the beginning of
3rd year if accounts are closed on 31st March every year.

14. A Ltd. purchased a machine for Rs. 1,20,000 on 1st April, 2009 and incurred Rs. 10,000 towards freight,
insurance, carriage inwards and installation charges. It was estimated that the machinery will have a scrap value
of Rs. 10,000 at the end of its useful life which is 10 years of 3,000 hours each. A Ltd. Decided to depreciate the
machines on ‘Machine Hour Rate Method’. The machine hours during first six years were as under:
Year 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Machine
1,000 3,000 3,500 3,000 2,500 2,000
hours
Calculate depreciation for each year.

15. A machine is purchased for Rs. 6,00,000. Its estimated useful life is 10 years with a residual value of Rs. 30,000.
The machine is expected to produce 1,90,000 units during its life time. Expected distribution pattern of
production is as follows:
Year Productions
1-3 22,000 units per year
4-6 20,000 units per year
7-10 16,000 units per year
Required: Determine the amount of depreciation for each year using Production Units Method and calculate
book value at the end of 7th year.

16. Veda Ltd. acquired a lease right for a mine for 10 years of a mine on 1st Jan. 2011 on a lump sum payment of Rs.
6,75,000 to the landlord. It was estimated by the expert that the coal deposit of the mine was 20,00,000 tonnes,
75 per cent of which could be raised within the period allowed. Veda Ltd. Decided to depreciate the lease on the
depletion method. The sales and stocks (in tonnes) were as under:
Year 2011 2012 2013 2014 2015 2016
Sales 97,500 1,00,500 1,21,000 1,47,500 1,68,500 1,99,500
Closing Stock 2,500 2,000 3,000 2,500 2,000 2,500
Required: Determine the amount of depreciation for each year

Bhagwati Education Institute Page 12

 Concept and Accounting of Depreciation

17. A Plant & Machinery costing ` 10,00,000 is depreciated on straight line assuming 10 year working life and zero
residual value, for four years. At the end of the fourth year, the machinery was revalued upwards by ` 40,000.
The remaining useful life was reassessed at 8 year. Calculate Depreciation for the fifth year.
[Nov 2019 (4 marks)]
18. X purchased a machinery on 1st January 2017 for ` 4,80,000 and spent ` 20,000 on its installation. On July 1,
2017 another machinery costing ` 2,00,000 was purchased. On 1st July, 2018 the machinery purchased on 1st
January, 2017 having become scrapped and was sold for ` 2,90,000 and on the same date fresh machinery was
purchased for ` 5,00,000. Depreciation is provided annually on 31st December at the rate of 10% p.a. on written
down value. Prepare Machinery account for the years 2017 and 2018.
[Nov 2019 (4 marks)]

19. M/s. Green Channel purchased a second-hand machine on 1st January, 2015 for ` 1,60,000. Overhauling and
erection charges amounted to ` 40,000. Another machine was purchased for ` 80,000 on 1st July, 2015. On
1st July, 2017, the machine installed on 1st January, 2015 was sold for ` 1,00,000. Another machine amounted
to ` 30,000 was purchased and was installed on 30th September, 2017. Under the existing practice the
company provides depreciation @ 10% p.a. on original cost. However, from the year 2018 it decided to adopt
WDV method and to charge depreciation @ 15% p.a. You are required to prepare Machinery account for the
years 2015 to 2018.
[RTP – Nov 2019, RTP – Nov 2020]

Bhagwati Education Institute Page 13