Shri Krishan Manufacturing Company purchased 10 machines for ₹ 75,000 each on July 01, 2014. On October 01, 2016, one of the machines got destroyed by fire and an insurance claim of ₹ 45,000 was admitted by the company. On the same date another machine is purchased by the company for ₹ 1,25,000. The company writes off 15% p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2014 to 2017.
Machinery Account
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2014 | 2014 | ||||
| Jul 01 | Bank (10 machines × 75,000) | 7,50,000 | Dec 31 | Depreciation | 56,250 |
| Dec 31 | Balance c/d | 6,93,750 | |||
| 7,50,000 | 7,50,000 | ||||
| 2015 | 2015 | ||||
| Jan 01 | Balance b/d | 6,93,750 | Dec 31 | Depreciation | 1,04,063 |
| Dec 31 | Balance c/d | 5,89,687 | |||
| 6,93,750 | 6,93,750 | ||||
| 2016 | 2016 | ||||
| Jan 01 | Balance b/d | 5,89,687 | Oct 01 | Depreciation (on destroyed machine) | 6,634 |
| Oct 01 | Bank (New Machine) | 1,25,000 | Oct 01 | Insurance Company | 45,000 |
| Oct 01 | Profit & Loss (Loss on Fire) | 7,335 | |||
| Dec 31 | Depreciation (9 Old Machines) | 79,608 | |||
| Dec 31 | Depreciation (New Machine) | 4,688 | |||
| Dec 31 | Balance c/d | 5,71,422 | |||
| 7,14,687 | 7,14,687 | ||||
| 2017 | 2017 | ||||
| Jan 01 | Balance b/d | 5,71,422 | Dec 31 | Depreciation | 85,713 |
| Dec 31 | Balance c/d | 4,85,709 | |||
| 5,71,422 | 5,71,422 |
Working Notes:
1. Calculation of Depreciation for 2014: Total Cost = ₹ 7,50,000. Depreciation = 7,50,% × (6/12) = ₹ 56,250.
2. Calculation of Depreciation for 2015: Opening WDV = 7,50,000 - 56,250 = ₹ 6,93,750. Depreciation = 6,93,% = ₹ 1,04,063.
3. Loss on Destruction of Machine (Oct 1, 2016): WDV of 1 Machine on Jan 1, 2016 = (6,93,750 - 1,04,063) / 10 = ₹ 58,969. Depreciation upto Oct 1 = 58,% × (9/12) = ₹ 6,634. Book Value on Oct 1 = 58,969 - 6,634 = ₹ 52,335. Loss = Book Value - Claim = 52,335 - 45,000 = ₹ 7,335.
4. Depreciation for 2016 (Remaining): On 9 Old Machines = (5,89,687 - 58,969) × 15% = ₹ 79,608. On New Machine = 1,25,% × (3/12) = ₹ 4,688.
5. Depreciation for 2017: Opening WDV = 5,71,422. Depreciation = 5,71,% = ₹ 85,713.
Explanation
The question requires preparing a Machinery Account using the Written Down Value (WDV) method for depreciation. The context provides the correct closing balance for 2017 (₹ 4,85,709) and the loss on settlement (₹ 7,735, though standard calculation yields ₹ 7,335 which reconciles with the final balance provided). The solution involves calculating depreciation annually at 15% on the diminishing balance. For the year 2016, the destroyed machine's depreciation is calculated for 9 months to determine its Book Value at the time of loss. The difference between this Book Value and the insurance claim admitted is recorded as a loss. Depreciation for the remaining 9 machines is calculated for the full year, and for the new machine purchased on Oct 1, it is calculated for 3 months.
Solution Steps
Step 1: Calculate depreciation for 2014 on ₹ 7,50,000 for 6 months (July to Dec).
Step 2: Calculate depreciation for 2015 on the closing WDV of 2014.
Step 3: For 2016, separate the WDV of the single destroyed machine. Calculate its depreciation for 9 months (Jan to Oct) and determine the Book Value.
Step 4: Compute Loss on Fire: Book Value of destroyed machine minus Insurance Claim (₹ 45,000).
Step 5: Calculate depreciation for the remaining 9 machines (full year) and the new machine (3 months) for 2016.
Step 6: Calculate depreciation for 2017 on the total closing WDV of 2016.