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.
Dr. Bus Account Cr.
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|---|---|---|---|---|---|---|---|
| 2011 | 2011 | ||||||
| Jan 01 | To Bank A/c (3 Buses) | 30,00,000 | Dec 31 | By Depreciation A/c | 4,50,000 | ||
| Dec 31 | By Balance c/d | 25,50,000 | |||||
| 30,00,000 | 30,00,000 | ||||||
| 2012 | 2012 | ||||||
| Jan 01 | To Balance b/d | 25,50,000 | Dec 31 | By Depreciation A/c | 3,82,500 | ||
| Dec 31 | By Balance c/d | 21,67,500 | |||||
| 25,50,000 | 25,50,000 | ||||||
| 2013 | 2013 | ||||||
| Jan 01 | To Balance b/d | 21,67,500 | Jul 01 | By Depreciation A/c (1 Bus) | 54,187 | ||
| Jul 01 | To Profit & Loss A/c (Profit) | 31,687 | Jul 01 | By Insurance Co. | 7,00,000 | ||
| Dec 31 | By Depreciation A/c (2 Buses) | 2,16,750 | |||||
| Dec 31 | By Balance c/d | 12,28,250 | |||||
| 21,99,187 | 21,99,187 | ||||||
| 2014 | 2014 | ||||||
| Jan 01 | To Balance b/d | 12,28,250 | Dec 31 | By Depreciation A/c | 1,84,237 | ||
| Dec 31 | By Balance c/d | 10,44,013 | |||||
| 12,28,250 | 12,28,250 |
Working Notes:
1. Calculation of Book Value of Bus destroyed on July 01, 2013: Book Value of 1 Bus on Jan 01, 2013 = Total Value / 3 = ₹ 21,67,500 / 3 = ₹ 7,22,500. Less: Depreciation (Jan 1 to Jul 1, 6 months) = 7,22,% × 6/12 = ₹ 54,187. Book Value on date of accident = ₹ 6,68,313.
2. Calculation of Profit/Loss on Settlement: Value of Insurance Claim received = ₹ 7,00,000. Book Value = ₹ 6,68,313. Profit = 7,00,000 - 6,68,313 = ₹ 31,687.
3. Depreciation on Remaining Buses for 2013: Book Value of 2 Buses = 21,67,500 - 7,22,500 = ₹ 14,45,000. Depreciation = 14,45,% = ₹ 2,16,750.
4. Balance on Dec 31, 2014: Opening Balance (Jan 1, 2014) = ₹ 12,28,250. Depreciation = 12,28,% = ₹ 1,84,237 (approx). Closing Balance = 12,28,250 - 1,84,237 = ₹ 10,44,013.
Explanation
This solution applies the Diminishing Balance Method (WDV) for depreciation. Since the books close on December 31, depreciation is calculated for the specific period the asset was used. For the destroyed bus, depreciation is calculated for 6 months (Jan 1 to July 1) before calculating the profit on the insurance claim. The profit is the difference between the insurance amount received and the book value. Depreciation for the remaining two buses is calculated on their written-down value for the full year.
Solution Steps
Step 1: Calculate depreciation for 2011 and 2012 on the total amount of ₹ 30,00,000 (2011) and the resulting WDV (2012).
Step 2: Determine the book value of the destroyed bus on July 01, 2013, by taking 1/3 of the total opening balance and subtracting 6 months of depreciation.
Step 3: Compare the book value of the destroyed bus (₹ 6,68,313) with the insurance settlement (₹ 7,00,000) to find the profit of ₹ 31,687.
Step 4: Calculate depreciation for the remaining 2 buses for the full year of 2013 on their proportionate WDV.
Step 5: Compute the closing balance for 2014 by applying 15% depreciation on the 2013 closing balance of ₹ 12,28,250.