On July 01, 2010, Ashok Ltd. Purchased a Machine for ₹ 1,08,000 and spent ₹ 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be ₹ 12,000. Prepare machine account and depreciation Account in the books of Ashok Ltd. For first three years, if depreciation is written off according to straight line method. The account are closed on December 31st, every year.
Working Notes:
-
Calculation of Cost of Machine: Purchase Price = ₹ 1,08,000 Installation Cost = ₹ 12,000 Total Cost = ₹ 1,20,000
-
Calculation of Annual Depreciation: Depreciation p.a. = (Cost - Salvage Value) / Useful Life = (1,20,000 - 12,000) / 12 = ₹ 9,000
-
Depreciation for the year 2010: (From July 01, 2010 to Dec 31, 2010 = 6 months) = 9,/12 = ₹ 4,500
Ledger Accounts:
Machine Account
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|---|---|---|---|---|---|---|---|
| 2010 | 2010 | ||||||
| Jul 01 | Bank A/c | 1,08,000 | Dec 31 | Depreciation A/c | 4,500 | ||
| Jul 01 | Bank A/c (Installation) | 12,000 | Dec 31 | Balance c/d | 1,15,500 | ||
| 1,20,000 | 1,20,000 | ||||||
| 2011 | 2011 | ||||||
| Jan 01 | Balance b/d | 1,15,500 | Dec 31 | Depreciation A/c | 9,000 | ||
| Dec 31 | Balance c/d | 1,06,500 | |||||
| 1,15,500 | 1,15,500 | ||||||
| 2012 | 2012 | ||||||
| Jan 01 | Balance b/d | 1,06,500 | Dec 31 | Depreciation A/c | 9,000 | ||
| Dec 31 | Balance c/d | 97,500 | |||||
| 1,06,500 | 1,06,500 | ||||||
| 2013 | |||||||
| Jan 01 | Balance b/d | 97,500 |
Depreciation Account
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|---|---|---|---|---|---|---|---|
| 2010 | 2010 | ||||||
| Dec 31 | Machine A/c | 4,500 | Dec 31 | Profit & Loss A/c | 4,500 | ||
| 2011 | 2011 | ||||||
| Dec 31 | Machine A/c | 9,000 | Dec 31 | Profit & Loss A/c | 9,000 | ||
| 2012 | 2012 | ||||||
| Dec 31 | Machine A/c | 9,000 | Dec 31 | Profit & Loss A/c | 9,000 |
Explanation
The solution calculates depreciation using the Straight Line Method as required. The cost of the machine includes the purchase price plus installation charges. Since the machine was purchased on July 01, 2010, depreciation for the first year (2010) is calculated for 6 months. For the subsequent years (2011 and 2012), full annual depreciation is charged. The Machine Account is reduced by the depreciation amount each year, resulting in a balance of ₹ 97,500 on Jan 1, 2013, which matches the textbook answer key.
Solution Steps
Step 1: Determine Total Cost of Machine (Purchase Price + Installation) = 1,08,000 + 12,000 = 1,20,000.
Step 2: Calculate Annual Depreciation using SLM formula: (Total Cost - Salvage Value) / Life = (1,20,000 - 12,000) / 12 = 9,000.
Step 3: Calculate Depreciation for 2010 (6 months): 9,000 * (6/12) = 4,500.
Step 4: Prepare Machine Account by debiting the cost and crediting depreciation and balance c/d.
Step 5: Prepare Depreciation Account by debiting the depreciation expense and crediting transfer to Profit & Loss.