Question 29 of 43advanced🔧 ApplyNumerical6 marks

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.

Correct Answer

Working Notes:

  1. Calculation of Depreciation and Book Value of Machine 1 (Sold):

    • Cost: ₹ 1,00,000
    • Depreciation (15% p.a. SLM):
      • 2011-12 to 2014-15 (4 years): 15,000×4=₹60,00015,000 \times 4 = ₹ 60,000
      • 2015-16 (April 1 to Oct 1, 2015 - 6 months): 15,000×6/12=₹7,50015,000 \times 6/12 = ₹ 7,500
    • Total Depreciation: 60,000+7,500=₹67,50060,000 + 7,500 = ₹ 67,500
    • Book Value on Date of Sale (Oct 1, 2015): 1,00,000−67,500=₹32,5001,00,000 - 67,500 = ₹ 32,500

  2. Calculation of Loss on Sale of Machine 1:

    • Book Value: ₹ 32,500
    • Less: Sale Price: ₹ 25,000
    • Loss on Sale: ₹ 7,500

  3. Calculation of Balance of Machine 2:

    • Cost: ₹ 2,50,000
    • Depreciation (2015-16): 15% of ₹ 2,50,000 = ₹ 37,500
    • Book Value (31.03.2016): 2,50,000−(AccumulatedDepofpastyears+CurrentYear)2,50,000 - (Accumulated Dep of past years + Current Year)
    • Note: Accumulated Dep up to 31.03.15 (from 01.07.12) was ₹ 1,03,125. Current year dep is ₹ 37,500.
    • Closing Balance: ₹ 1,09,375

Machinery Account

DateParticularsAmount (₹)DateParticularsAmount (₹)
2015 Apr 01To Balance b/d2015 Oct 01By Machinery Disposal A/c32,500
Machine 1 (BV)40,0002016 Mar 31By Depreciation A/c37,500
Machine 2 (BV)1,46,8752016 Mar 31By Balance c/d1,09,375
Total1,86,875Total1,79,375

(Note: The opening balance b/d is the Book Value after deducting accumulated depreciation from previous years. Depreciation on Machine 1 for 6 months is credited to the Disposal Account, not here, if following strict SLM crediting asset account approach, but standard practice often simplifies. In the table above, the Depreciation of 7,500 is accounted for in the Disposal transfer or credited to Machinery A/c before transfer. The column above shows the transfer of the Net Book Value.)

Corrected Machinery Account Presentation:

Dr. Machinery Account Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
2015-162015-16
Apr 01To Balance b/d1,86,875Oct 01By Depreciation A/c7,500
(M1: 40,000 + M2: 1,46,875)Oct 01By Machinery Disposal A/c32,500
Mar 31By Depreciation A/c (M2)37,500
Mar 31By Balance c/d1,09,375
1,86,8751,86,875

Machinery Disposal Account

Dr. Machinery Disposal Account Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
2015-162015-16
Oct 01To Machinery A/c32,500Oct 01By Bank A/c25,000
Mar 31By Profit & Loss A/c (Loss)7,500
32,50032,500
Exercise: Numerical Problems | Q: 7 | (Page 47)
For More Understanding

Explanation

This solution calculates depreciation using the Straight Line Method (SLM) at 15% p.a. For the machinery sold, depreciation is calculated for the partial period until the date of sale. The loss on sale is determined by comparing the book value (Cost minus total depreciation) with the sale price. The Machinery Account is maintained by crediting depreciation directly to the account, reducing the asset's book value annually. The Machinery Disposal Account isolates the profit or loss on the sale of the asset.

Solution Steps

  1. Step 1: Calculate the opening balance of the Machinery Account on April 1, 2015, by deducting accumulated depreciation from the cost of both machines.

  2. Step 2: Compute depreciation for Machine 1 for the period April 1, 2015, to October 1, 2015 (6 months), which is ₹ 7,500.

  3. Step 3: Determine the Book Value of Machine 1 on the date of sale: ₹ 40,000 (Opening BV) - ₹ 7,500 (Current Dep) = ₹ 32,500.

  4. Step 4: Calculate the Loss on Sale: Book Value (₹ 32,500) - Sale Price (₹ 25,000) = ₹ 7,500.

  5. Step 5: Compute depreciation for Machine 2 for the full year (₹ 37,500) and find the closing balance (₹ 1,09,375).

  6. Step 6: Prepare the Machinery Account reflecting the sale transfer, depreciation, and closing balance.

  7. Step 7: Prepare the Machinery Disposal Account showing the book value debited and sale proceeds/loss credited.

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