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A machine was purchased on 1-1-2009 for Rs. 5,00,000. On 1-10-2009 another machine was purchased for Rs. 3,00,000. In both the cases, estimated scrap values are 20% of the cost. Depreciation is to be provided at 20% p.a. on the machines under reducing balance system. The period is calendar year
(i) Pass the necessary journal entries
(ii) Show the m machinery account for 2009 and 2010.
(iv) Show how the machinery account would appear in the balance sheet as on 31 December 2010.

Q.2. X purchased a second-hand machinery on 1.2.2006 for Rs. 50,000; paid Rs. 11,000 for its overhauling and Rs. 5,000 for its installation which was completed by 31.3.2006. The company provides depreciation on its machinery at 15% p.a. on diminishing balance method from the date it was put to use and closes its books on 31 December every year. On 1.10.2007, a repair work was carried out on the machine and Rs. 5,000 were paid for the same. The machine was sold on 31 10.2008 for a sum of Rs. 11,000 and an amount of Rs. 1,000 was paid as dismantling charges. Prepare Machinery Account from 2006 to 2008,

Q.3. On 1 April, 2009, a firm purchased a machinery for Rs. 2,00,000. On 1 October in the same accounting year, additional machinery costing Rs. 1,00,000 was purchased. On 1 October, 2010, the machinery purchased on 1 April, 2009, having become obsolete, was sold off for Rs. 90,000. On 1 October, 2011, new machinery was purchased for Rs. 2,50,000 while the machinery purchased on 1 October, 2009 was sold for Rs. 85,000 on the same day. The firm provides depreciation on its machinery @ 10% per annum on original cost on 31 March every year. Show machinery account, provision for depreciation account and depreciation account for the period of three accounting years ending 31 March, 2012.

Q.4. On I January 2004 the balance in plant and machinery account was Rs. 9,00,000 (including Rs. 1,00,000 which was purchased on 1 January 2003). On 30 January 2004 additional plant was purchased for Rs. 1,00,000. On 31 December 2004 part of the plant which had cost Rs. 20,000 on 1 January 2003 was sold for Rs. 21,000.
On 31 December 2004, again a part of the plant was sold for Rs. 40,000. This was purchased on 1 January 2003 for Rs. 60,000.
Prepare plant and machinery account for two years, that is 2004 and 2005 by providing depreciation at 10% p.a. assuming reducing balance method.

Q.5. A company purchased a second hand machine on 1 April 2002 for Rs. 17,000 and spent immediately for its repairs Rs. 1,800 and for its erection Rs. 1,200. On 1 October 2002, it purchased another machine for Rs. 10,000 and on 1 April 2003 it sold off the first machine, (purchased in 2002) for Rs. 16,000. On the same date, it purchased a new machine for Rs. 25,000. On 1 July 2004 it bought a second hand machine for Rs. 8,000 and spent immediately for its repairs and erection Rs. 2,000. On the same date it sold the second machine (bought in 2002) for Rs. 8,500.
Depreciation was charged at 10% on original cost method and accounts were closed on 31 March every year. Prepare Machinery Account for the years ending on 31 March 2003, 2004 and 2005.

Q.6. On its erection. On 1st July, 2005, an additional machinery costing Rs. 20,000 was purchased. On 1st July, 2007 the machine purchased on 1st January, 2005 was sold for Rs. 30,600 and on the same date a new machine was purchased at a cost of Rs. 40,000. Depreciation was charged @ 10% per annum by Written Down Value Method on 31st December each year. In 2008, the company decided to change the method of depreciation from Written Down Value Method to Straight Line Method, the rate being 5% per annum. Prepare Machinery Account for the first four calendar years.
[Ans. Bal. c/d on 31/12/2007 – 53,500.]

Q.7. X Ltd. acquired a machine on 1-1-2006 for Rs. 3,20,000. The company charges depreciation @ 20% p.a. on straight line basis. During 2008 a modification was made at a cost of Rs. 32,000 which it was considered would extend the useful life of the machine by 2 years. At the same time an important component of the machine was replaced at a cost of Rs. 20,000, because of excessive wear and tear. Routine maintenance during the year cost Rs. 5,000.
Show Machinery Account and Provision for Depreciation Account for the year ended on 31st December, 2008. 
[Ans. Balance c/d on 31/12/2008 – 3,72,000.]

Q.8. Machinery Account of Ravi Company Ltd., showed debit balance of Rs. 32,400 on 1 January 2007, depreciation being provided at 10%. On 1 July, 2007, a part of the machinery purchased for Rs. 10,000 on 1 January 2005 was sold for Rs. 7,000 and on the same date a new machinery which cost Rs. 20,000 was purchased. On 31 December 2007, the company decided to change the method of depreciation from w.d.v. method to straight line method with effect from 1 January 2005; depreciation remaining at 10% p.a. 
[Ans. Balance c/d on 31/12/2007 – 40,000.]

Q.9. A purchased on 1st January, 2004 certain machinery for Rs. 1,94,000 and spent Rs. 6,000 on its erection. On 1st July, 2004 additional machinery costing Rs. 1,00,000 was purchased. On 1st July, 2006, the Machinery purchased on 1st January, 2004 having become obsolete, was auctioned for Rs. 1,00,000 and on the same day new machinery was purchased at a cost of Rs. 1,50,000. Depreciation was provided for annually on 31st December at the rate of 10% per annum on the original cost of machinery. No depreciation need be provided when a machinery is sold on auction, for that part of the year in which sale or auction takes place. But for the above, depreciation shall be provided on time basis. In 2007, however, A changed this method of providing depreciation and adopted the method of writing off 15% p.a. on the written down value on the balance as appeared in Machinery Account on 1-1-2007. Show the Machinery Account for the calendar years 2004 to 2007.
[Ans. Balance c/d on 31/12/2007 – Machinery I - 56,807, II – 1,17,938.]

Q.10. A Co charged depreciation @ 20% on written down value. Machinery costing Rs. 1,00,000, Rs. 40,000 and Rs. 30,000 were purchased on 1-1-2000, 1-7-2001 and 1-10- 2002 respectively. On 1-10-2003, machinery purchased on 1-7-2001 was damaged and replaced by a new machine costing Rs. 50,000. The damaged machinery was insured and an insurance claim of Rs. 24,800 (after adjustment of value of scrap) was admitted by the Insurance Co.
The scrap was sold for Rs. 2,200.
Show Machinery Account, Accumulated Depreciation Account and Machinery Account for the year 2003.
[Ans. Balance c/d on 1/10/2003 – 1,80,000.]

Q.11. Neha Limited purchased a second hand machine on 1st January, 2000 for Rs. 1,60,000; overhauling charges amounted to Rs. 40,000. Another machine was purchased on 1st July, 2000 for Rs. 80,000. On 1st July 2002, the machine installed on 1st January, 2000 was sold for Rs. 1,00,000. On the same date another machine was purchased for Rs. 30,000 and was installed on 30th September, 2002.
Under the existing practice, the company provides depreciation at 10% on original cost. However, from the year 2003, it was decided to adopt written down value method and to charge depreciation at 15% per annum. This change was to be made with retrospective effect. Prepare Machinery Account in the books of Neha Limited from 2000 to 2003.
[Ans. Balance c/d on 1/1/2003 –69,983.]

Q.12. X Ltd. commenced business on 1-1-2002, when the company purchased plant and equipment for Rs. 7,00,000. It adopted a policy of :
(i) Charging depreciation at 15% p.a. on diminishing balance basis and
(ii) Charging full year's depreciation on additions.
Over the years, its purchases of plant have been : on 1-8-2003 Rs. 1,50,000 and on 30-9-2006 Rs. 2,00,000.
On 1-1-2006, it was decided to change the method and rate of depreciation to 10% p.a. on straight line basis with retrospective effect from 1-1-2002, the adjustment being made in the accounts for the year ending 31-12-2006.
Calculate the difference in depreciation to be adjusted in the Plant and Equipment Account on 1-1-2006 and show the ledger account for the year 2006.
[Ans. Balance c/d on 31/12/2006 – 6,20,000.]

Q.13. ABC Ltd. purchased on 1st Jan., 1998 second hand plant for Rs. 30,000 and immediately spent Rs. 20,000 in overhauling it. On 1st July, 1998 additional machinery of a cost of Rs. 25,000 was purchased. On 1st July, 2000, the plant purchased on 1st Jan., 1998 became obsolete and was sold for Rs. 10,000. On that date new machinery was purchased at cost of Rs. 60,000.
Depreciation was provided at 10% p.a. on the original cost of the asset. In 2001 the company changed this method of providing depreciation to 15% p.a. W.D.V. with retrospective effect.
Show Plant and Machinery A/c and provision for Depreciation A/c for the years 1998-2001.
[Ans. Balance c/d on 31/12/2001 – Machinery I – 25,000 Machinery II – 60,000.]


Q.1. The terms depreciation, depletion and amortization mean the same thing.
Ans. True/False : In so far as the meaning of these terms is concerned, they convey the same thing i.e. decline in the value of asset or allocation of the cost of the asset over its useful life. But these three terms are not applied to the same type of the asset. The term depreciation is used for tangible fixed assets amortisation for intangible fixed assets and depletion for wasting assets.

Q.2. The depreciation process does not set aside any cash for the replacement of an asset.
Ans. True : The depreciation simply saves the profits so that it is not used for drawings or dividends. There is no guarantee that cash equivalent to the amount of depreciation will be available for the replacement of the asset. In fact that would depend upon the amount of cash sales.

Q.3. All capital expenditures associated with a particular asset are added to the cost of the asset.
Ans. True : All capital expenditures, which are associated with the particular asset, increase the operating or earning capacity of the asset and thus become part of the cost of the asset. This is true whether the capital expenditures are incurred before the asset is put to use or afterwards.

Q.4. Under written down value method, the asset gets reduced to zero.
Ans. False : The asset gets reduced to zero in the straight line method of depreciation. Under diminishing balance method, there is always some unwritten amount which is usually adjusted in the last year of the useful life of the asset.

Q.5. The depreciation is an appropriation of profit when sinking fund is maintained.
Ans. False : The depreciation is a charge against the profit when sinking fund is maintained.

Q.6. Providing depreciation in the accounts reduces the amount of profit available for dividend.
Ans. True : Dividends are distributed out of net profit available after providing for depreciation. So the provision for depreciation reduces the amount of profit available for distribution as dividend.

Q.7. Depreciation cannot be provided in case of loss in a financial year.
Ans. False : Depreciation is a charge against the profit and not an appropriation of profit. So depreciation has to be provided for even in case of loss in a financial year.

Q.8. There exists difference between the written down value method and diminishing balance method of depreciation.
Ans. False : Under this method, depreciation is calculated by applying fixed rate to a diminishing balance known as written down value.

Q.9. The expressions-depreciation is to be charged at 10% and 10% p.a. on furniture and fittings-carry the same meaning.
Ans. False : The expressions differ as to their interpretation on the basis of time factor. Depreciation rate of 10% p.a. implies that time of additions to and disposal of fixed assets has to be taken into consideration by calculating depreciation on pro-rata basis whereas simply 10% rate implies that the date of addition or disposal is immaterial for the purpose of calculating depreciation for the year.

Q.10. Depreciation is a cash expenditure like other normal expenses.
Ans. False : Depreciation is not a cash expenditure. Like other normal expenses (e.g. salaries, rent etc.) it does not result in any cash outflow.

Q.11. M/s Ram & Co. did not provide any depreciation on Plant and Machinery, as its market value is much higher than the cost price.
Ans. False : Plant and Machinery is held with an intention of being used for the purpose of producing goods or providing services and is not held for resale in the ordinary course of business. Depreciation is to be charged on Plant and Machinery irrespective of its market value.

Q.12. There is no difference between the written down value method and diminishing balance method of depreciation.
Ans. True : Written down value method is also known as diminishing balance method of depreciation. Under this method depreciation is calculated by applying a fixed rate to diminishing balance known as written down value.

Q.13. Depreciation is a process of allocation of the cost of fixed asset.
Ans. True : Depreciation is a measure of the wearing out, consumption or loss of value of a depreciable asset arising from use, affluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset.

Q.14. Land is also a depreciable asset.
Ans. False : Land is not a depreciable asset, a fact recognised by accountants all over the world.

Q.15. Depreciable amount refers to the difference between historical cost and the market value of an asset.
Ans. True : Depreciable amount refers to historical cost less salvage value.

Q.16. Higher depreciation will not affect cash profit of the business.
Ans. True : Depreciation is not a cash expenditure and as such, the amount of depreciation does not affect cash profit of the business.

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