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.
Working Notes:
1. Calculation of Cost of Plant (Old): Purchase Price = ₹ 3,00,000 Installation Cost = ₹ 50,000 Total Cost = ₹ 3,50,000
2. Calculation of Depreciation (Old Plant): Rate = 15% p.a. on ₹ 3,50,000 = ₹ 52,500 p.a.
- 2015 (July 1 to Dec 31): 6 months Depreciation = 52,/12 = ₹ 26,250
- 2016 (Jan 1 to Dec 31): 12 months Depreciation = ₹ 52,500
- 2017 (Jan 1 to Oct 1): 9 months Depreciation = 52,/12 = ₹ 39,375
3. Calculation of Loss on Sale of Plant: Total Depreciation charged = 26,250 + 52,500 + 39,375 = ₹ 1,18,125 Book Value at date of sale = Cost - Depreciation Book Value = 3,50,000 - 1,18,125 = ₹ 2,31,875 Sale Value = ₹ 1,50,000 Loss on Sale = 2,31,875 - 1,50,000 = ₹ 81,875
4. Depreciation on New Plant (2017): Cost = ₹ 4,00,000 Period (Oct 1 to Dec 31) = 3 months Depreciation = 4,00,% × 3/12 = ₹ 15,000
Machinery Account
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2015 | 2015 | ||||
| July 01 | To Bank A/c | 3,50,000 | Dec 31 | By Balance c/d | 3,50,000 |
| 2016 | 2016 | ||||
| Jan 01 | To Balance b/d | 3,50,000 | Dec 31 | By Balance c/d | 3,50,000 |
| 2017 | 2017 | ||||
| Jan 01 | To Balance b/d | 3,50,000 | Oct 01 | By Provision for Dep. A/c | 1,18,125 |
| Oct 01 | To Bank A/c (New) | 4,00,000 | Oct 01 | By Bank A/c (Sale) | 1,50,000 |
| Oct 01 | By Profit & Loss A/c (Loss) | 81,875 | |||
| Dec 31 | By Balance c/d | 4,00,000 | |||
| Total | 7,50,000 | Total | 7,50,000 |
Provision for Depreciation Account
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2015 | 2015 | ||||
| Dec 31 | To Balance c/d | 26,250 | Dec 31 | By Depreciation A/c | 26,250 |
| 2016 | 2016 | ||||
| Dec 31 | To Balance c/d | 78,750 | Jan 01 | By Balance b/d | 26,250 |
| Dec 31 | By Depreciation A/c | 52,500 | |||
| Total | 78,750 | Total | 78,750 | ||
| 2017 | 2017 | ||||
| Oct 01 | To Machinery A/c (Transfer) | 1,18,125 | Jan 01 | By Balance b/d | 78,750 |
| Dec 31 | To Balance c/d | 15,000 | Oct 01 | By Depreciation A/c (Old) | 39,375 |
| Dec 31 | By Depreciation A/c (New) | 15,000 | |||
| Total | 1,33,125 | Total | 1,33,125 |
Explanation
This solution applies the Straight Line Method of depreciation as specified in the context. The cost of the plant includes the purchase price plus installation expenses (₹ 3,00,000 + ₹ 50,000). Depreciation is calculated based on the time the asset was used during the accounting year (ending Dec 31).
For the sale of the plant, the accumulated depreciation up to the date of sale (Oct 1, 2017) is transferred from the Provision for Depreciation Account to the Machinery Account. The book value is then compared against the sale price to determine the loss on sale (₹ 81,875). Finally, depreciation on the new plant is calculated for 3 months (Oct to Dec).
Solution Steps
Step 1: Determine the original cost of the machine by adding purchase price (₹ 3,00,000) and installation costs (₹ 50,000) to get ₹ 3,50,000.
Step 2: Calculate depreciation for 2015 (6 months), 2016 (full year), and 2017 up to the sale date (9 months) using the 15% flat rate.
Step 3: Determine the Book Value at the time of sale (Cost - Accumulated Depreciation) and subtract the Sale Price to find the Loss on Sale (₹ 81,875).
Step 4: Prepare the Machinery Account, recording the purchase, the sale entry (including accumulated depreciation and loss), and the new purchase.
Step 5: Prepare the Provision for Depreciation Account, showing the balance brought forward, the depreciation for the current year(s), and the transfer of accumulated depreciation on the sold asset.