Question 33 of 43advanced🔧 ApplyNumerical8 marks

Saraswati Ltd. purchased a machinery costing ₹10,00,000 on January 01, 2011. A new machinery was purchased on 01 May, 2012 for ₹15,00,000 and another on July 01, 2014 for ₹12,00,000. A part of the machinery which originally cost ₹2,00,000 in 2011 was sold for ₹75,000 on April 30, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year.

Correct Answer

WORKING NOTES:

Calculation of Depreciation:

Year 2011:

  • Machinery I (₹10,00,000): 10% × ₹10,00,000 = ₹1,00,000

Year 2012:

  • Machinery I (₹10,00,000): 10% × ₹10,00,000 = ₹1,00,000
  • Machinery II (₹15,00,000, purchased May 01): 10% × ₹15,00,000×8000 \times 8/12 = ₹1,00,000
  • Total: ₹2,00,000

Year 2013:

  • Machinery I: ₹1,00,000
  • Machinery II: 10% × ₹15,00,000 = ₹1,50,000
  • Total: ₹2,50,000

Year 2014:

  • Sold part (₹2,00,000, Jan-Apr): 10% × ₹2,00,000×4000 \times 4/12 = ₹6,667
  • Remaining Machinery I (₹8,00,000): 10% × ₹8,00,000 = ₹80,000
  • Machinery II: ₹1,50,000
  • Machinery III (₹12,00,000, purchased July 01): 10% × ₹12,00,000×6000 \times 6/12 = ₹60,000
  • Total: ₹2,96,667

Year 2015:

  • Remaining Machinery I: ₹80,000
  • Machinery II: ₹1,50,000
  • Machinery III: 10% × ₹12,00,000 = ₹1,20,000
  • Total: ₹3,50,000

Calculation of Loss on Sale:

  • Cost of sold machinery: ₹2,00,000
  • Accumulated Depreciation (2011-2013): ₹60,000
  • Depreciation for 2014 (4 months): ₹6,667
  • Total Accumulated Depreciation: ₹66,667
  • Book Value: ₹2,00,000 - ₹66,667 = ₹1,33,333
  • Sale Price: ₹75,000
  • Loss on Sale: ₹1,33,333 - ₹75,000 = ₹58,333

MACHINERY ACCOUNT

DateParticularsAmount (₹)DateParticularsAmount (₹)
2011 Jan 01To Bank A/c10,00,0002011 Dec 31By Balance c/d10,00,000
2012 Jan 01To Balance b/d10,00,0002012 Dec 31By Balance c/d25,00,000
2012 May 01To Bank A/c15,00,000
2013 Jan 01To Balance b/d25,00,0002013 Dec 31By Balance c/d25,00,000
2014 Jan 01To Balance b/d25,00,0002014 Apr 30By Machinery Disposal A/c2,00,000
2014 Jul 01To Bank A/c12,00,0002014 Dec 31By Balance c/d35,00,000
2015 Jan 01To Balance b/d35,00,0002015 Dec 31By Balance c/d35,00,000

PROVISION FOR DEPRECIATION ACCOUNT

DateParticularsAmount (₹)DateParticularsAmount (₹)
2011 Dec 31To Balance c/d1,00,0002011 Dec 31By Depreciation A/c1,00,000
2012 Dec 31To Balance c/d3,00,0002012 Jan 01By Balance b/d1,00,000
2012 Dec 31By Depreciation A/c2,00,000
2013 Dec 31To Balance c/d5,50,0002013 Jan 01By Balance b/d3,00,000
2013 Dec 31By Depreciation A/c2,50,000
2014 Apr 30To Machinery Disposal A/c66,6672014 Jan 01By Balance b/d5,50,000
2014 Dec 31To Balance c/d7,80,0002014 Apr 30By Depreciation A/c6,667
2014 Dec 31By Depreciation A/c2,90,000
2015 Dec 31To Balance c/d11,30,0002015 Jan 01By Balance b/d7,80,000
2015 Dec 31By Depreciation A/c3,50,000

MACHINERY DISPOSAL ACCOUNT

DateParticularsAmount (₹)DateParticularsAmount (₹)
2014 Apr 30To Machinery A/c2,00,0002014 Apr 30By Provision for Dep. A/c66,667
2014 Apr 30By Bank A/c75,000
2014 Apr 30By Profit & Loss A/c (Loss)58,333
2,00,0002,00,000

Final Balances as on 31.12.2015:

  • Balance of Machinery A/c: ₹35,00,000
  • Balance of Provision for Depreciation A/c: ₹11,30,000
  • Loss on Sale of Machinery: ₹58,333
Exercise: Numerical Problems | Q: 11 | (Page 48)
For More Understanding

Explanation

This question tests the student's understanding of depreciation accounting using the Provision for Depreciation method (also known as the accumulated depreciation method). Key concepts applied include: (1) calculating depreciation on original cost at 10% p.a. on a pro-rata basis for assets purchased/sold during the year, (2) maintaining the Machinery Account at original cost throughout, (3) accumulating all depreciation charges in a separate Provision for Depreciation Account, (4) handling the sale of a part of machinery mid-year by transferring the cost and accumulated depreciation to a Machinery Disposal Account, and (5) calculating the profit or loss on disposal. The textbook answer confirms: Loss on sale ₹58,333, Provision for Depreciation balance ₹11,30,000, and Machinery balance ₹35,00,000 as on 31.12.2015.

Solution Steps

  1. Step 1: Calculate yearly depreciation for each machinery on original cost @10% p.a. with pro-rata adjustment for partial years.

  2. Step 2: Prepare Machinery Account showing all purchases at cost and the sale entry; balance remains at original cost.

  3. Step 3: Prepare Provision for Depreciation Account by adding yearly depreciation and deducting accumulated depreciation on sold machinery.

  4. Step 4: Calculate accumulated depreciation on sold part (₹2,00,000): 3 years + 4 months = ₹66,667.

  5. Step 5: Prepare Machinery Disposal Account: Cost (₹2,00,000) - Accumulated Dep. (₹66,667) - Sale Price (₹75,000) = Loss (₹58,333).

  6. Step 6: Verify final balances match expected answers: Machinery ₹35,00,000 and Provision for Depreciation ₹11,30,000.

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