Question 34 of 43intermediate🔧 ApplyNumerical6 marks

On July 01, 2011 Ashwani purchased a machine for ₹2,00,000 on credit. Installation expenses ₹25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be ₹20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2011 and prepare necessary ledger accounts for first three years.

Correct Answer

Books of Ashwani Journal Entries for the year 2011

DateParticularsL.F.Debit Amount (₹)Credit Amount (₹)
2011 Jul 01Machine A/c Dr.2,00,000
To Creditors A/c2,00,000
(Being machine purchased on credit)
2011 Jul 01Machine A/c Dr.25,000
To Bank A/c25,000
(Being installation expenses paid by cheque)
2011 Dec 31Depreciation A/c Dr.20,500
To Machine A/c20,500
(Being depreciation charged for 6 months)

Ledger Accounts

Dr. Machine Account Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
2011 Jul 01Creditors2,00,0002011 Dec 31Depreciation20,500
Jul 01Bank25,000Dec 31Balance c/d2,04,500
2,25,0002,25,000
2012 Jan 01Balance b/d2,04,5002012 Dec 31Depreciation41,000
Dec 31Balance c/d1,63,500
2,04,5002,04,500
2013 Jan 01Balance b/d1,63,5002013 Dec 31Depreciation41,000
Dec 31Balance c/d1,22,500
1,63,5001,63,500

Dr. Depreciation Account Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
2011 Dec 31Machine20,5002011 Dec 31Profit & Loss20,500
2012 Dec 31Machine41,0002012 Dec 31Profit & Loss41,000
2013 Dec 31Machine41,0002013 Dec 31Profit & Loss41,000
Exercise: Numerical Problems | Q: 12 | (Page 48)
For More Understanding

Explanation

The question specifies the Straight Line Method for depreciation and implies the 'Asset Account Method' (where depreciation is credited directly to the Asset account) based on the context's answer key format.

  1. Cost Calculation: The machine's cost includes the purchase price (₹2,00,000) and installation expenses (₹25,000), totaling ₹2,25,000. Installation is capitalized because it is necessary to bring the asset to working condition.
  2. Depreciation Calculation: Using the Straight Line Method formula: (Cost - Scrap Value) / Estimated Life. Annual Depreciation = (2,25,000 - 20,000) / 5 = ₹41,000.
  3. Pro-rata Depreciation: Since the machine was purchased on July 01, 2011, depreciation for the first year (2011) is calculated for 6 months (July to December): ₹41,000×6000 \times 6/12 = ₹20,500.
  4. Ledger Preparation: The Machine Account is reduced annually by the depreciation amount. The balance on Dec 31, 2013, matches the textbook context: ₹1,22,500.

Solution Steps

  1. Step 1: Calculate Total Cost of Machine = Purchase Price + Installation = ₹2,00,000 + ₹25,000 = ₹2,25,000.

  2. Step 2: Calculate Annual Depreciation = (Total Cost - Scrap Value) / Life = (2,25,000 - 20,000) / 5 = ₹41,000.

  3. Step 3: Calculate Depreciation for 2011 (6 months) = 41,000 × (6/12) = ₹20,500.

  4. Step 4: Record Journal Entries for purchase (Creditors), installation (Bank), and depreciation (Machine) for the year 2011.

  5. Step 5: Prepare Machine Account for 2011, 2012, and 2013, crediting depreciation and carrying down the closing balance each year.

  6. Step 6: Verify 2013 Closing Balance: 2012 Balance (1,63,500) - 2013 Depreciation (41,000) = ₹1,22,500.

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