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.
Machinery Account
Dr. Side: 2014 Jan 01 To Bank A/c: ₹ 20,00,000 2016 Sep 01 To Bank A/c: ₹ 15,00,000
Cr. Side: 2014 Dec 31 By Depreciation A/c: ₹ 3,00,000 2014 Dec 31 By Balance c/d: ₹ 17,00,000 (Total: ₹ 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 (Total: ₹ 17,00,000)
2016 Jan 01 To Balance b/d: ₹ 14,45,000 2016 Mar 01 By Depreciation A/c (on 1/4th part): ₹ 9,031 2016 Mar 01 By Insurance Co. A/c: ₹ 40,000 2016 Mar 01 By Profit & Loss A/c (Loss): ₹ 3,12,219 2016 Dec 31 By Depreciation A/c (Old): ₹ 1,62,563 2016 Dec 31 By Depreciation A/c (New): ₹ 75,000 2016 Dec 31 By Balance c/d (Old): ₹ 9,21,187 2016 Dec 31 By Balance c/d (New): ₹ 14,25,000 (Total: ₹ 29,45,000)
2017 Jan 01 To Balance b/d (Old): ₹ 9,21,187 2017 Jan 01 To Balance b/d (New): ₹ 14,25,000 2017 Dec 31 By Depreciation A/c (Old): ₹ 1,38,178 2017 Dec 31 By Depreciation A/c (New): ₹ 2,13,750 2017 Dec 31 By Balance c/d (Old): ₹ 7,83,009 2017 Dec 31 By Balance c/d (New): ₹ 12,11,250 (Total: ₹ 23,46,187)
Explanation
The problem requires preparing the Machinery Account using the Diminishing Balance Method. The date '2010 to 2013' in the question text is a typo; based on the context (purchase in 2014) and the provided answer key (Balance in 2017), the account is prepared from 2014 to 2017. Depreciation is calculated at 15% p.a. on the opening balance. When part of the machinery (1/4th) is damaged, its book value is calculated up to the date of the incident (March 01, 2016) to determine the profit/loss on settlement. The remaining 3/4th machinery continues to depreciate for the full year. The new machinery purchased on Sep 01, 2016 is depreciated for 4 months.
Solution Steps
Step 1: Calculate Depreciation for 2014 and 2015. 2014: 15% of ₹ 20,00,000 = ₹ 3,00,000. WDV = ₹ 17,00,000. 2015: 15% of ₹ 17,00,000 = ₹ 2,55,000. WDV = ₹ 14,45,000.
Step 2: Calculate Loss on Settlement of Insurance Claim (March 01, 2016). Value of 1/4th Machinery on Jan 1, 2016: (1/4) of ₹ 14,45,000 = ₹ 3,61,250. Depreciation for 2 months (Jan-Feb): ₹ 3,61,250 * 15% * (2/12) = ₹ 9,031. Book Value on Mar 1: ₹ 3,61,250 - ₹ 9,031 = ₹ 3,52,219. Loss = Book Value - Insurance Claim = ₹ 3,52,219 - ₹ 40,000 = ₹ 3,12,219.
Step 3: Calculate Depreciation for 2016 (Remaining Old & New). Remaining Old (3/4th): ₹ 14,45,000 - ₹ 3,61,250 = ₹ 10,83,750. Dep = 15% = ₹ 1,62,563. Closing Bal = ₹ 9,21,187. New Machine: Purchased Sep 1. Dep = ₹ 15,00,000 * 15% * (4/12) = ₹ 75,000. Closing Bal = ₹ 14,25,000.
Step 4: Calculate Balance for 2017. Old Remaining: Dep = 15% of ₹ 9,21,187 = ₹ 1,38,178. Closing Bal = ₹ 7,83,009. New Machine: Dep = 15% of ₹ 14,25,000 = ₹ 2,13,750. Closing Bal = ₹ 12,11,250. Total Balance on 31.12.2017 = ₹ 7,83,009 + ₹ 12,11,250 = ₹ 19,94,259 (Approx ₹ 19,94,260).