GSEB Class 11 Solutions Chapter 2 Depreciation Accounts

Write Correct Option From Those Given Below Each Question:

 

Question 1. Depreciation is what kind of expense of business?
(a) Capital
(b) Revenue
(c) Capital and Revenue
(d) Fictitious
Answer: (b) Revenue
In simple words: Depreciation is considered an operational cost, meaning it's a regular expense that a business incurs as part of its daily activities. It helps to match the expense of using an asset with the income it helps generate over its useful life.

Exam Tip: Remember that revenue expenses are short-term costs that appear on the income statement, distinguishing them from capital expenditures which benefit multiple periods and appear on the balance sheet.

 

Question 2. On which price of asset, depreciation is calculated under straight-line method?
(a) Book value
(b) Depreciated price
(c) Market value
(d) Cost price
Answer: (d) Cost price
In simple words: When you use the straight-line method, you always calculate depreciation based on the asset's original purchase price, not its changing value over time. It's a simple, constant calculation each year.

Exam Tip: The straight-line method simplifies depreciation by using the initial cost, which is easy to track. Be careful not to confuse this with methods that use the diminishing book value.

 

Question 3. Depreciation indicates ………………. in useful value of assets.
(a) increase
(b) reduction
(c) increase-reduction
(d) none of these
Answer: (b) Reduction
In simple words: Depreciation essentially means that an asset's worth or usefulness goes down over time. It shows how much of an asset's value has been used up.

Exam Tip: Depreciation always represents a decrease in asset value. Understanding this core concept is key to all depreciation calculations.

 

Question 4. Under which method the annual amount of depreciation remains identical?
(a) Straight-line method
(b) Reducing balance method
(c) Revaluation method
(d) Mileage method.
Answer: (a) Straight-line method
In simple words: With the straight-line method, the amount of depreciation charged each year stays exactly the same throughout the asset's life. It's a consistent annual charge.

Exam Tip: The main characteristic of the straight-line method is its consistency. This makes it straightforward for budgeting and financial planning.

 

Question 5. Which of the following asset is not depreciable?
(a) Building
(b) Furniture
(c) Machines
(d) Land
Answer: (d) Land
In simple words: Land is generally not depreciated because it's considered to have an indefinite useful life and usually doesn't wear out or become obsolete in the same way buildings or machines do. Its value often increases rather than decreases.

Exam Tip: Land is a non-depreciable asset because it has an unlimited useful life. Buildings, machines, and furniture, however, have finite useful lives and are subject to depreciation.

 

Question 6. Under which method of depreciation, value of asset never becomes zero?
(a) Reducing balance method
(b) Annuity method
(c) Depletion unit method
(d) Equal instalment method
Answer: (a) Reducing balance method
In simple words: The reducing balance method lowers the depreciation amount each year, so the asset's book value decreases gradually but never actually reaches zero. There's always a small remaining value.

Exam Tip: The reducing balance method, also known as the written-down value method, ensures that the asset always retains some book value, which can be a key distinction in accounting problems.

 

Question 7. Under which method of depreciation, balance is maintained between depreciation amount and repairing expense?
(a) Machine hour method
(b) Compound interest method
(c) Reducing balance method
(d) Straight-line method
Answer: (c) Reducing balance method
In simple words: The reducing balance method provides a better balance because depreciation is higher in earlier years when repair costs are lower. As the asset gets older and repair costs increase, the depreciation amount decreases.

Exam Tip: This method is favored for assets that require more maintenance as they age, as it provides a more even charge to the profit and loss account over the asset's life when considering both depreciation and repairs.

 

Question 8. To which of the following depreciation is applicable?
(a) Capital
(b) Sales
(c) Liabilities
(d) None of these
Answer: (a) Capital
In simple words: Depreciation applies to capital assets, which are long-term assets like machinery or buildings that a business owns. It's not something that applies to sales or debts.

Exam Tip: Depreciation is always charged against fixed tangible assets (capital assets) because they lose value over time through use or obsolescence.

 

Question 9. Which of the following expense is not paid in cash?
(a) Rent
(b) Commission
(c) Salary
(d) Depreciation
Answer: (d) Depreciation
In simple words: Depreciation is an expense that reduces an asset's value on paper, but no actual cash leaves the business for it. It's a non-cash expense.

Exam Tip: Identify non-cash expenses by determining if they involve a direct outflow of money. Depreciation, unlike rent or salaries, is an accounting adjustment, not a cash payment.

 

Question 10. Where does the loss on sale of machine will be recorded?
(a) Credit side of machine account
(b) Debit side of machine account
(c) Credit side of depreciation account
(d) Debit side of depreciation account
Answer: (a) Credit side of machine account
In simple words: When you sell a machine and make a loss, that loss is noted on the credit side of the machine account. This reduces the balance of the machine account for the part that was sold.

Exam Tip: Remember that losses on asset sales are typically credited to the asset account and debited to the profit and loss account, reflecting the asset's removal and the financial impact.

 

Question 2. Answer The Following Questions In One Sentence:

 

Question 1. Under which method annual amount of depreciation reduces every year?
Answer: Under the Reducing Balance Method, the yearly amount of depreciation goes down each year.
In simple words: The depreciation amount gets smaller each year using the Reducing Balance Method.

Exam Tip: Clearly state the method's name when asked about the decreasing annual depreciation amount.

 

Question 2. What are depreciable assets?
Answer: Assets that experience a drop in value because of their limited life and are used for more than one accounting year are known as depreciable assets.
In simple words: Depreciable assets are those that lose value over time and are used for many years.

Exam Tip: Define depreciable assets by highlighting their finite life and their long-term use in the business.

 

Question 3. Explain the meaning of depreciation.
Answer: Depreciation refers to a gradual and lasting decrease in the value of an asset for any reason.
In simple words: Depreciation means an asset's value slowly and permanently goes down.

Exam Tip: A precise definition of depreciation should include 'gradual and permanent reduction in value' and 'for any reason' (e.g., wear and tear, obsolescence).

 

Question 4. On which assets of business, depreciation is calculated?
Answer: Depreciation is calculated on the fixed tangible assets of a business.
In simple words: We calculate depreciation on the long-term physical assets a business owns.

Exam Tip: Specify "fixed tangible assets" as the key term for assets on which depreciation is charged.

 

Question 5. Write journal entry to transfer depreciation to profit and loss account at the end of the year.
Answer: Profit and Loss A/c Dr
To Depreciation A/c
(Being amount of depreciation transferred to Profit and Loss A/c after closing the Depreciation A/c.)
In simple words: At year-end, move the depreciation amount from the Depreciation Account to the Profit and Loss Account.

Exam Tip: When writing journal entries, ensure correct debit and credit accounts and provide a clear narration in parentheses.

 

Question 6. Write the formula to determine the depreciation rate under equal instalment method.
Answer: Rate of depreciation \( R = \frac{D}{C} \times 100 \). Where, D = Annual depreciation, C = Cost price of an asset.
In simple words: To find the depreciation rate, divide the yearly depreciation by the asset's original cost and multiply by 100.

Exam Tip: Clearly define all variables used in the formula to ensure full marks.

 

Question 7. Describe different methods to record depreciation on assets from the viewpoint of accounting entries.
Answer: From the viewpoint of accounting entries, there are two main methods for recording depreciation on assets:
1. Method to write-off the depreciation directly to the concerned asset account.
2. Method to create the provision for depreciation account.
In simple words: There are two main accounting ways to record depreciation: either directly reducing the asset's value or setting up a separate provision account for it.

Exam Tip: When listing methods, provide clear, concise names for each to help the examiner understand your answer quickly.

 

Question 8. Which account is credited to record depreciation under depreciation provision method?
Answer: 'Depreciation provision A/c' is credited to record depreciation under the depreciation provision method.
In simple words: When using the provision method, the 'Depreciation Provision Account' gets a credit entry.

Exam Tip: Specify the exact account name, 'Depreciation Provision A/c', to demonstrate precise accounting knowledge.

 

Question 9. Where and how depreciation is disclosed in the Balance Sheet?
Answer: The annual amount of depreciation is shown in annual accounts on the debit side of the profit and loss account. In the Balance Sheet, it is taken away from the cost price of an asset on the asset side at the end of each accounting year.
In simple words: Depreciation shows up as a debit on the profit and loss account and is subtracted from the asset's cost on the balance sheet.

Exam Tip: Clearly mention both the Profit and Loss Account (debit side) and the Balance Sheet (deducted from asset cost) for a complete answer.

 

Question 10. To which account and side, profit on sale of asset is recorded?
Answer: Profit on the sale of an asset is recorded on the credit side of the profit and loss account and on the debit side of the asset account.
In simple words: Profit from selling an asset is credited to the profit and loss account and debited to the asset account.

Exam Tip: Specify both the Profit and Loss Account (credit for profit) and the Asset Account (debit for profit realization) for accurate disclosure.

 

Question 3. Answer In Brief:

 

Question 1. One machine was purchased on 1-4-'08. On 1-4-'14 the opening balance of machine account is Rs 28,000. Depreciation on machine is charged at 10 % under straight-line method. Write journal entry for depreciation on 31 -3-'15.
Answer: Necessary computation and explanation:
1. Under the straight-line method, the amount of depreciation is determined based on the cost price of the machine (i.e., asset). First of all, in this problem, the cost price of the machine will be determined.
Assume cost price of machine is Rs 100
-Depreciation at 10% for six years (From 1-4-'08 to 31-3-'14 = 6 years) = \( 100 \times \frac{10}{100} \times 6 = \text{Rs } 60 \)
Therefore, Book value / Balance of machine on 1-4-'14 Rs 40
As given, the opening balance (book value) of the machine on 1-4-'14 is Rs 28,000.
If balance of machine is Rs 40, the cost price is Rs 100.
If balance of machine is Rs 28,000, the cost price is (Rs)
\( = \frac{28,000 \times 100}{40} = 70,000 \)
Therefore, Cost price of machine = Rs 70,000
2. In the straight-line method, the annual depreciation is calculated based on the asset's cost price, which stays the same every year.
Annual depreciation \( D = \frac{C \times R}{100} \)
\( = \frac{70,000 \times 10}{100} = 7,000 \)
3. Journal entry of depreciation:

In simple words: First, calculate the machine's original cost, which is Rs 70,000. Then, figure out the yearly depreciation using the straight-line method, which comes to Rs 7,000. Finally, record this amount with a journal entry, debiting the Depreciation Account and crediting the Machine Account.

Exam Tip: When solving problems involving the straight-line method, always remember to ascertain the original cost of the asset first before calculating annual depreciation. Ensure journal entries are correctly balanced.

 

Question 2. One machine was purchased on 1-4-'13 for Rs 30,000. Depreciation on machine is charged at 10% under reducing balance method. Write journal entry for depreciation on 31-3-'15.
Answer: Necessary computation of depreciation amount:
Cost price of machine on 1-4-'13 Rs 30,000
- Depreciation at the end of first year (10% on Rs 30,000) Rs 3,000
Balance of machine A/c on 31-3-'14 Rs 27,000
- Depreciation at the end of the second year (on 31-3-'15) (10% on Rs 27,000) Rs 2,700
Journal entry of depreciation:

In simple words: Calculate depreciation each year on the reduced balance. For 31-3-'15, it's 10% of Rs 27,000 (the balance from the previous year), which is Rs 2,700. Journal this by debiting Depreciation A/c and crediting Machine A/c.

Exam Tip: For the reducing balance method, always ensure depreciation is calculated on the book value (opening balance) of the asset for that year, not the original cost.

 

Question 3. On 1-4-'14 book value of machine was 34,000. Depreciation is calculated at 20 % under reducing balance method. This machine was sold at 35 % profit on book value on 30-9-‘14. From this information write journal entry for sale of machine.
Answer: Ascertain selling price of machine:
Book value of machine on 1-4-'14 Rs 34,000
Depreciation at 20 % for 6 months up to 30-9-'14 \( = 34,000 \times \frac{20}{100} \times \frac{6}{12} = \text{Rs } 3,400 \)
Therefore, Book value of machine on 30-9-'14 Rs 30,600
+ 35% Profit on Rs 30,600 \( = 30,600 \times \frac{35}{100} = \text{Rs } 10,710 \)
Therefore, Selling price of machine Rs 41,310
Journal entry for sale of machine:

In simple words: Calculate the book value at the sale date, add the profit to find the selling price, and then record the cash received, depreciation for the period, and the gain in the journal entry.

Exam Tip: When selling an asset mid-year, always calculate depreciation up to the date of sale to determine the correct book value before calculating profit or loss on sale.

 

Question 4. Hiral Limited charges depreciation on Its assets at 5 % under straight-line method. If annual depreciation amount is 6,000, determine cost price of machines.
Answer: Cost price of machines:
Annual depreciation \( D = \frac{C \times R}{100} \)
Therefore, Cost price of machines can be obtained as follows:
Where, \( D = 6,000; R = 5 \) and \( C = ? \)
Cost price of machines \( C = \frac{D \times 100}{R} \)
\( = \frac{6,000 \times 100}{5} \)
\( = 1,20,000 \)
Therefore, Cost price of machines Rs 1,20,000
In simple words: To find the original cost, use the formula by rearranging it: multiply the annual depreciation by 100 and then divide by the depreciation rate. This calculation shows the machine's initial cost was Rs 1,20,000.

Exam Tip: Be comfortable with rearranging formulas to find unknown variables. Always double-check your calculations, especially when dealing with percentages and large numbers.

 

Question 5. Sarvesh Limited has purchased a machine on 1 -4- '13. By charging depreciation at 10 % under reducing balance method, Rs 3,240 is recorded as depreciation on 31 -3 -'15, determine cost price of machine.
Answer: Cost price of machine:
Assume cost price of machine on 1-4-'13 Rs 100
Depreciation at 10% for first year Rs 10
Balance of Machine A/c on 1-4-'14 Rs 90
- Depreciation at 10% for second year (on 31-3-'15) Rs 9
Here, amount of depreciation on 31-3-'15 is given Rs 3,240.
If depreciation of machine is Rs 9, cost price of machine is Rs 100.
If depreciation of machine is Rs 3,240, cost price of machine is \( \frac{3,240 \times 100}{9} = 36,000 \)
Therefore, Cost price of machine = Rs 36,000
In simple words: If depreciation for the second year is Rs 3,240 at a 10% reducing balance rate, we can work backward. Based on calculations, the original cost price of the machine was Rs 36,000.

Exam Tip: When working backwards to find the original cost, use the depreciation rate and the depreciation amount for a specific year to establish a proportional relationship to the unknown cost price.

 

Question 4. Answer The Following Questions To The Point:

 

Question 1. Explain the meaning of depreciation and describe its characteristics.
Answer: Depreciation: Generally, depreciation means a reduction in the value of an asset. Depreciation is the amount written off from the value of an asset during its useful life.
Meaning/Definitions:
1. William Pickles: A gradual and permanent reduction in the quality, quantity, and value of an asset is called depreciation.
2. Carter: Depreciation is the gradual and permanent decrease in the value of an asset from any cause.
Characteristics of depreciation:

1. Revenue expense: Depreciation is a revenue expense. So it is debited to the Profit and Loss Account.
2. Time: Depreciation is an expense related to time.
3. Usage of asset: Depreciation is based on consumption along with time.
4. Fixed assets: Depreciation is to be calculated on the fixed tangible assets of a business.
5. Useful value of assets: Depreciation indicates a continuous and permanent reduction in the useful value of assets.
6. Written off amount: Depreciation is not paid in cash, hence, the amount written off as depreciation during a year stays in the business.
7. At the end of an accounting year: Generally, depreciation is calculated at the end of an accounting year.
8. Provision: Depreciation is one kind of provision.
In simple words: Depreciation is the steady decrease in an asset's worth. Its key features include being a regular expense, tied to time and use, applied to long-term physical assets, indicating a permanent loss of value, being a non-cash item, recorded yearly, and treated as a type of provision.

Exam Tip: When defining and describing characteristics, use clear, concise language. For diagrams, ensure labels are legible and accurately reflect the corresponding points in your explanation.

 

Question 2. What are the objectives for charging depreciation?
Answer: Depreciation is an expense like any other revenue expense. However, it is not paid in cash. Despite this, it is taken into consideration while preparing accounts for the following reasons:

1. To find out true and fair profit: To know the true and fair profit or loss of the business, all expenses and incomes should be considered. Depreciation is a reduction in the asset's value, showing a part of the asset consumed. So, it is a revenue expense, and without considering this, a true picture of profit or loss will not be available. In short, it is essential to consider depreciation to know the true and fair profit-loss of the business. Thus, it is debited to the Profit and Loss Account.
2. To know the true and fair financial position: If the business's assets are shown in the Balance Sheet at a price lower than their depreciation, then a true and fair financial position will be indicated. If depreciation is not deducted from the relevant asset, the Balance Sheet will not show a true position of financial affairs.
3. Replacement of the asset: In any business, if the asset's value decreases after a specific period, it becomes necessary to acquire or purchase a new asset to replace the old one. For this, a provision for depreciation is made to keep the capital intact. Normally, at the time of asset replacement, the amount will be realised by selling such securities. Thus, it is not required to raise new capital as a new asset can be purchased from such provision.
4. To determine the true cost of production: To determine the cost of goods produced in a factory or services, expenses affecting production or production-related expenses should be considered. Thus, like other expenses, depreciation on depreciable assets used in business is essential to be considered to determine the cost of goods. If depreciation, being an expense, is not taken into account, then the true cost of the goods produced cannot be determined.
5. To comply with legal provision: According to section 205 of the Companies Act, no company can distribute dividends without making a provision for depreciation from its profits. It is prudent to provide for depreciation from the viewpoint of sound accounting principles.
6. To consider as a paid business expense: The revenue expenses of a business are based on time. Depreciation is also a revenue expense based on time. Depreciation is also a pre-paid business expense. Therefore, it is written off proportionally at the end of each accounting year as depreciation. Hence, depreciation should be considered as a paid business expense.
7. Determination of selling price: Business profit is based on the selling price of goods or services. The selling price of goods or services is based on the cost of goods or service. Therefore, to arrive at a selling price for goods or services, total cost is determined, where depreciation is included.
In simple words: Charging depreciation helps businesses to accurately calculate profit, show a true financial picture, save money for asset replacement, determine correct production costs, follow legal rules, recognize it as an expense over time, and set fair selling prices.

Exam Tip: When discussing objectives, provide a brief explanation for each point to demonstrate your understanding of *why* depreciation is important in accounting beyond just its calculation.

 

Question 3. Define depreciation and discuss factors of depreciation.
Answer: Definitions:
1. R. G. Williams: The gradual reduction in an asset's value due to wear and tear, passage of time, or new inventions is termed as depreciation. It may be defined as a gradual depreciation in the value of an asset due to use.
2. Matchman and Slawine: Depreciation is a process of estimating and recording a periodic charge arising because of the exhausted useful life of capital assets.
Factors of depreciation: The following are the factors or causes of depreciation :

1. Passage of time: With usage and consumption, the asset depreciates, and its useful life also decreases. With more usage, its useful life will decrease to a greater extent, e.g., Machinery will be more depreciated if it is used in three shifts.
2. By effluxion of time: The life of some assets ultimately becomes zero at the end of a specified period, e.g., for a land on lease, its value will be zero at the end of a specified period. Here, it is not important whether the asset is used or not.
3. New inventions: Sometimes, due to new technology and inventions, the assets in use become useless or less profitable. In such a case, a new asset will be purchased to replace the old one. Thus, the possibility of a reduction in the asset's useful life due to new inventions should be taken into consideration as a factor of depreciation.
4. Exhaustion of quantity: The value of some assets is due to the quantity contained in them, e.g., a mine or an oil well. In such cases, assets get slowly exhausted, and a day comes when they get completely exhausted and have to be abandoned. This reduction is known as depreciation.
5. Permanent decrease in market price: When any asset's market price shows a permanent reduction in price compared to its cost price, such a reduction should be considered as depreciation of an asset.
6. Accident: Sometimes assets meet with an accident. Such an accident causes damage to the asset, which reduces its efficiency and utility.
7. Natural factors: Natural factors like floods, earthquakes, rain, etc., reduce an asset's useful life and thus decrease its efficiency and cost. It is a type of depreciation. When the quantity of petrol, spirit, etc., diminishes due to evaporation, it is considered depreciation.
In simple words: Depreciation is the steady decline in an asset's value. It happens because of factors like how much time passes, how much it's used, new technologies making it old-fashioned, running out of what it contains, market prices falling, unexpected accidents, and natural events.

Exam Tip: Ensure your definition of depreciation is precise. When discussing factors, provide a brief, clear explanation for each point to illustrate your understanding of its impact on asset value.

 

Question 4. Explain the factors in detail to be kept in mind to determine annual amount of depreciation and rate of depreciation.
Answer: The following points are to be considered while ascertaining the amount of depreciation and the rate of depreciation :

1. Cost price of the asset: While determining the cost price and the purchase price of the asset, all expenses incurred to bring it to its place of use, its erection, and installation charges are taken into consideration. In the case of old assets, if repairing is necessary, all expenses incurred on it, including the repairing expenses, should be added to the purchase price.
2. Estimated life of the asset: The estimated life of the asset is the estimated period of time during which the purchased asset can be used effectively. While determining the estimated life, all the technical facts, capacity of the assets, possibilities of new inventions, and business experience, etc., are to be considered.
3. Estimated scrap value: At the end of its useful life, the asset becomes useless. While calculating the depreciation rate, the estimated scrap value is to be considered and deducted from the asset's original cost.
4. Interest on the capital employed: When an asset is purchased, some capital is invested in it. If this capital were invested outside the business, it would have earned some interest. Thus, while calculating depreciation, such interest is to be taken into consideration.
5. Repairing and maintenance expenses: If money is spent on repairs and maintenance of the asset, its useful life can be increased. So, while calculating depreciation, such aspects should be considered.
6. New inventions and research: To face business competition, it becomes necessary to acquire new modern machines. For this, it is necessary to know about possible new inventions in the assets used in the business and their time interval. While determining the amount of depreciation, this time interval is considered.
7. Usage of asset: The asset's usage is an important factor in determining the depreciation rate. If the asset's usage is more, the depreciation amount will be more. If a machine in the factory is used for more than one shift, the depreciation should be calculated more.
In simple words: To calculate depreciation accurately, consider the asset's full cost (including setup), its expected useful lifespan, how much it can be sold for as scrap, any lost interest from the money invested, repair costs that extend its life, the risk of new inventions making it obsolete, and how heavily the asset is actually used.

Exam Tip: Always remember that the initial cost of an asset for depreciation purposes includes all expenditures required to bring the asset into its working condition and location.

 

Question 5. What are depreciable assets? Give its explanation and list out depreciable assets.
Answer: Meaning: Depreciation is calculated on the fixed tangible assets of a business, so such assets are known as depreciable assets. There is a reduction in value of some assets due to their limited life; they are also called depreciable assets.
Explanation: In normal circumstances, the following explanation can be given for depreciable assets :
1. An asset which has a limited life is called a depreciable asset, e.g., Furniture, Machine, Vehicles, etc. But an asset which has an unlimited life, this kind of asset is not considered a depreciable asset, e.g., Land.
2. An asset which is purchased for business use, meaning, which is not purchased for sale, is called a depreciable asset, e.g., Furniture and fixtures, A.C. machine, Motor-car, etc.
3. An asset which is used for more than one accounting year is called a depreciable asset.
The list of depreciable assets is as follows :
• Plant and Machines;
• Furniture and fixtures;
• Building;
• Leasehold properties;
• Vehicles;
• Goodwill, Patent, Trademark, Copyright, etc.
• Mines, Oil wells and gas wells;
• Loose tools.
In simple words: Depreciable assets are long-term physical items a business uses that lose value over time because they have a limited lifespan and are not meant for resale. Examples include machinery, furniture, buildings, vehicles, and intellectual property.

Exam Tip: To differentiate between depreciable and non-depreciable assets, remember that depreciable assets have a finite useful life and are used for business operations, while non-depreciable assets (like land) have indefinite useful lives or are not consumed by use.

 

Question 6. 1. Equal instalment method
Answer: Here, the residual value of the asset is subtracted from the original cost. Then, that resulting amount is split by the number of years of the asset's estimated useful life. The value obtained in this way is the annual depreciation under the equal instalment method. This approach is also known as the straight-line method or fixed instalment method. With this technique, the annual amount of depreciation stays the same.
Procedure to determine the amount of depreciation:
This is a simple and commonly used method to figure out depreciation. The annual amount of depreciation can be found using the following formula:
(1) Annual Depreciation \( D = \frac{C-S}{N} \)
(2) Annual Depreciation \( D = \frac{C \times R}{100} \)
Where,
\( D \) = Depreciation
\( C \) = Cost price
\( S \) = Scrap value
\( N \) = Total number of years of useful life
\( R \) = Rate of depreciation
Features:

• Depreciation is calculated on the cost price of the asset.
• The amount of depreciation for each year remains equal.
• The graph of depreciation for each year remains in a straight horizontal line.

Advantages:

• It is an easy method to understand.
• The method of calculating depreciation is easy.
• Since the depreciation amount is the same every year, it is not required to be calculated repeatedly.
• At the end of the useful life, the value of the asset becomes zero or equal to its scrap value.

Disadvantages:

• The amount of depreciation stays the same every year until the end of its useful life, even though repairs keep increasing as the asset gets older.
• This method becomes complicated for assets that are frequently purchased and sold.
• This method does not consider the interest on capital that is invested in the asset.
• No sufficient provision is made for the asset's replacement.
• A proper balance cannot be kept between depreciation and repair expenses because repairs are less in the initial years.
• When calculating depreciation, only the time factor is considered, for example, the depreciation on machines used in one shift is the same as those used in two shifts.

In simple words: This method takes the asset's original cost, subtracts its scrap value, and then divides that by how many years it will be useful. The depreciation amount is the same every year, making it easy to calculate. It is simple to use and understand, but it doesn't account for increasing repair costs as assets age or the interest on invested capital.

Exam Tip: Remember to always deduct the scrap value from the cost price before calculating depreciation under this method.

 

Question 6. 2. Reducing balance method
Answer: In this method, the amount of depreciation will be calculated at a fixed rate on the opening balance of the asset each year. It is not calculated on the asset's cost price. The amount of depreciation decreases every year. Thus, this method is known as the reducing balance method.
Formula for calculating the amount of annual depreciation:
Annual depreciation \( D = \frac{C \times R}{100} \)
Where,
\( C \) = Cost price (or the opening balance for that year, from the second year)
\( R \) = Rate of depreciation
\( D \) = Amount of annual depreciation
Under this method, the amount of depreciation is determined at the agreed rate of depreciation. The depreciation amount for the first year is calculated on the cost price of the asset, and after that, every year it is calculated on the asset's opening balance from that year.
Features:

• Every year the amount of depreciation goes on decreasing.
• The total amount of the asset's cost price is never fully written off, so the asset's cost price will never be zero at any time.
• There is a balance between the depreciation amount and repairing charges.

Suitable for which assets: This method is suitable for assets that have a long or indefinite useful life, such as Plant and Machinery, furniture, etc. For example, 10% depreciation on an asset of Rs. 2,000 will be Rs. 200 in the first year. The opening balance for the second year will be Rs. 1,800, and 10% on this will be Rs. 180, which is the depreciation for the second year. In the third year, depreciation will be calculated on Rs. 1,620.
Advantages:

• Here, the amount of depreciation is higher in the early years and decreases in the later years. Repairing charges are minimal in the early years and higher later on. So, there is a balance between the two.
• This method is more logical, scientific, and reasonable.
• This method is adopted for Income Tax purposes in India.
• The total amount of the asset's cost price is never completely written off, and so it never becomes zero.

Disadvantages:

• The interest on capital is not taken into consideration.
• Calculation of depreciation is not easy.
• There is no provision made for the asset's replacement.
• If there is a mistake in calculating depreciation, then the true profit or loss and the business's true financial position will not be revealed.

In simple words: This method calculates depreciation each year on the remaining book value of the asset, not its original cost. This means the depreciation amount gets smaller each year as the asset's value decreases. It balances depreciation and repair costs over time and is used for tax purposes, but it can be harder to calculate and doesn't plan for asset replacement.

Exam Tip: Ensure you use the *opening balance* for each year to calculate depreciation, not the original cost, except for the first year.

 

Question 7. Give difference: Equal Instalment Method and Reducing Balance Method
Answer:

In simple words: The Equal Instalment Method applies the same depreciation amount each year, eventually reducing the asset's value to zero. The Reducing Balance Method applies a fixed rate to the decreasing book value, resulting in smaller depreciation amounts over time and never reducing the asset to zero value.

Exam Tip: Clearly list points of comparison and use consistent terminology for both methods to score well in difference-based questions.

 

Question 8. Explain, different methods for recording of depreciation in books of accounts.
Answer: From the perspective of accounting entries, there are two main methods for recording depreciation in books of accounts:
1. Method to write-off the depreciation directly to the concerned asset account.
2. Method to create the provision for depreciation account.
Explanation of both methods with illustrations is as follows:
1. Method to write-off the depreciation directly to the concerned asset account: With this method, depreciation is calculated on an asset using the specified method and is debited to the Depreciation Account and credited to the Asset Account. As a result, the book value of the asset decreases by the amount of depreciation.
Illustration: Ashok Limited has purchased furniture for Rs. 50,000 on 1-4-'15. 10% depreciation is to be charged as per the straight-line method on this furniture. Pass journal entries for the first two years and show the effect in annual accounts in the company's books.
Journal Entries of Ashok Limited

Note: As shown above, at the end of every accounting year (i.e., on 31-3-'16 and on 31-3-'17), the amount of depreciation will be transferred to the Profit and Loss Account.

Profit and Loss Account (Partial) for the year ending on 31-3-'16

Balance Sheet (Partial) as on 31-3-'16

Profit and Loss Account (Partial) for the year ending on 31-3-'17

Balance Sheet (Partial) as on 31-3-'17

Note: As shown above, the asset (Furniture) is presented in the Balance Sheet at the value derived after deducting the depreciation of that year from its book value.
2. Method to create the provision for depreciation account: With this method, first, the amount of depreciation is determined by the specified method. The amount of depreciation is debited to the Depreciation Account and credited to the Provision for Depreciation Account (not to Asset A/c).

• Every year the amount of depreciation written off will accumulate in the Provision for Depreciation Account. The total accumulated amount shows the total depreciation on that asset up to that time.
• At the end of each accounting year, the cost price of assets less total accumulated depreciation is shown on the asset and receivables side of the Balance Sheet.
• At the end of each accounting year, the amount debited to the Depreciation Account is transferred to the Profit and Loss Account.
• The Provision for Depreciation Account is reflected in the books of accounts until the asset is sold off.

Illustration: Chintan Limited has purchased a machine on 1-4-'15 for Rs. 50,000 by cheque. Provide depreciation at 10% by the fixed instalment method by creating a provision for Depreciation Account. Prepare the journal entries of the company for the first two years and show the effects in the final account and prepare the Provision for Depreciation Account and Machine Account.
Calculation of annual depreciation:
\( D = \frac{C \times R}{100} = \frac{50,000 \times 10}{100} = 5,000 \)
Therefore, annual depreciation is Rs. 5,000.
Journal Entries of Chintan Limited

Ledger of Chintan Limited

Machine Account

Ledger of Mehta Limited Depreciation Account

In simple words: This solution showed how to figure out what two different machines are worth over time, even when one is bought later and the other is sold early. We calculated annual depreciation and then created ledger accounts to track all the money changes for each machine.

Exam Tip: When dealing with multiple assets, calculate depreciation for each separately and ensure all sale/purchase dates are correctly accounted for. Tables should be clearly structured.

 

Question 6. Raj Kumar Limited had purchased some machines for Rs. 82,000 on 1-4-‘12. The installation expense of this machine was of Rs. 8,000. On 1-10-'14 company purchased another machine for Rs. 70,000 and their installation expense was of Rs. 2,000. Company provides depreciation at 10 % every year under straight-line method. 30 % machines from first purchase were sold at 20 % profit of book value on 31-3-'15. From the above information prepeare machines account up to 31-3-'15 as well as show accounting effect in annual accounts of each year.
Answer:

To accurately prepare the accounts, we must first calculate the cost price and annual depreciation for both machines. Then, we determine the selling price of the portion of the first machine that was sold, including any profit earned. Finally, all these figures are used to create the machine account and show the effects in the annual financial statements.

1. Calculations for the first machine:
Cost price of first machine on 1-4-'12 \( = \text{Rs. } 82,000 + \text{Rs. } 8,000 = \text{Rs. } 90,000 \)
Annual depreciation for the first machine \( = \text{Rs. } 90,000 \times \frac{10}{100} = \text{Rs. } 9,000 \)

2. Calculations for the second machine:
Cost price of second machine on 1-10-'14 \( = \text{Rs. } 70,000 + \text{Rs. } 2,000 = \text{Rs. } 72,000 \)
Annual depreciation for the second machine \( = \text{Rs. } 72,000 \times \frac{10}{100} = \text{Rs. } 7,200 \)
Depreciation for six months (1-10-'14 to 31-3-'15) \( = \text{Rs. } 7,200 \times \frac{6}{12} = \text{Rs. } 3,600 \)

3. Selling price of 30% of the first machine (sold on 31-3-'15):
Cost price of 30% of the first machine \( = \text{Rs. } 90,000 \times \frac{30}{100} = \text{Rs. } 27,000 \)
Depreciation for three years (1-4-'12 to 31-3-'15) \( = \text{Annual Depreciation } \times 3 \text{ years} = \text{Rs. } 9,000 \times 3 = \text{Rs. } 27,000 \)
Book value of this portion of the machine on 31-3-'15 \( = \text{Cost Price} - \text{Total Depreciation} = \text{Rs. } 27,000 - \text{Rs. } 27,000 = \text{Rs. } 0 \)

This result of a zero book value for the sold portion (30% of the first machine) means the original calculation or assumption about depreciation for that part might be inaccurate, as a 20% profit on a zero book value would also be zero, leading to a selling price of zero. However, following the provided steps literally:

Let's re-evaluate the book value of the 30% machine. If total depreciation for 3 years is Rs. 27,000 (which is 30% of Rs. 90,000 for 3 years), then the book value on 31-3-'15 is Rs. 90,000 minus total depreciation for three years. The provided solution calculates based on the book value of the *remaining* machine and then applies profit on *that*, which is confusing. Let's strictly follow the provided steps for the 30% sold machine:

Cost price of 30% machine from first purchase \( = \text{Rs. } 90,000 \times \frac{30}{100} = \text{Rs. } 27,000 \)
Depreciation for three years (1-4-'12 to 31-3-'15) \( = \text{Annual Depreciation } \times 3 \text{ years} = \text{Rs. } 9,000 \times 3 = \text{Rs. } 27,000 \)
The original solution then states: `Book value of machine on 31-3-'15 = 18,900`, `+ 20% profit on 18,900 = 18,900 × (20/100) = 3,780`, `Selling price of machine sold = 22,680`. This indicates that the book value of the *entire* machine was used in calculation, then a proportion taken, which is inconsistent. I will use the *provided numerical outcomes* as per Iron Rule 6. The original breakdown is: `Book value of machine on 31-3-'15 = Rs. 18,900` `+ 20% profit on 18,900 = 18,900 × (20/100) = Rs. 3,780` `Selling price of machine sold = Rs. 22,680` These figures must be for the remaining 70% of the machine, or a specific 30% after certain calculation. Given the inconsistency, I will present the provided numerical outcome for "Selling price of 30% machine" as it is. The original solution calculates the book value of the *entire* machine as `Rs. 90,000 - (Rs. 9,000 * 3) = Rs. 63,000`. Then, `30% of Rs. 63,000 = Rs. 18,900`. Then `20% profit on Rs. 18,900 = Rs. 3,780`. Selling price \( = \text{Rs. } 18,900 + \text{Rs. } 3,780 = \text{Rs. } 22,680 \). This is the correct interpretation.

Ledger of Raj Kumar Limited Machine Account

Effect in Annual Accounts

Profit and Loss Account (Partial) for the year ending on 31-3-'13

Balance Sheet (Partial) as on 31-3-'13

Profit and Loss Account (Partial) for the year ending on 31-3-'14

Balance Sheet (Partial) as on 31-3-'14

Profit and Loss Account (Partial) for the year ending on 31-3-'15

Balance Sheet (Partial) as on 31-3-'15

In simple words: This problem involved keeping track of multiple machines bought and sold at different times. We calculated each machine's cost and how much its value went down each year. Then, we showed all these changes in a main account and in the yearly financial reports to give a clear picture of the company's assets.

Exam Tip: When an asset is sold partially, it's crucial to calculate the book value and depreciation only for the portion being sold. Profits or losses on sale should be recorded correctly in the Profit and Loss Account.

 

Question 7. Sharma Limited has purchased a machine for Rs. 67,000 on 1-4-'12. Installation expense of this machine was Rs. 3,000. Depreciation is to be provided at 10 % every year under reducing balance method. Ascertain amount of depreciation, pass journal entries and prepare machine account and depreciation account for first three years. Show accounting effect in annual accounts of first two years.
Answer:

To address this question, we must first calculate the machine's full cost, then determine the depreciation for each of the three years using the reducing balance method. After this, we prepare the necessary journal entries, machine account, and depreciation account. Finally, we show how these affect the annual accounts for the first two years.

(1) Calculation of depreciation:
Cost price of a machine on 1-4-'12 \( = \text{Rs. } 67,000 + \text{Rs. } 3,000 = \text{Rs. } 70,000 \)
Depreciation for the first year (10% on Rs. 70,000) \( = \text{Rs. } 7,000 \)
Book value / Opening balance of machine on 1-4-'13 \( = \text{Rs. } 70,000 - \text{Rs. } 7,000 = \text{Rs. } 63,000 \)
Depreciation for the second year (10% on Rs. 63,000) \( = \text{Rs. } 6,300 \)
Book value / Opening balance of machine as on 1-4-'14 \( = \text{Rs. } 63,000 - \text{Rs. } 6,300 = \text{Rs. } 56,700 \)
Depreciation for the third year (10% on Rs. 56,700) \( = \text{Rs. } 5,670 \)
Book value / Opening balance of machine as on 1-4-'15 \( = \text{Rs. } 56,700 - \text{Rs. } 5,670 = \text{Rs. } 51,030 \)

(2) Annual depreciation is: Rs. 7,000, Rs. 6,300 and Rs. 5,670 respectively.

Journal Entries of Sharma Limited

Ledger of Sharma Limited Machine Account

Ledger of Sharma Limited Depreciation Account

Effect in Annual Accounts

Profit and Loss Account (Partial) for the year ending on 31-3-'13

Balance Sheet (Partial) as on 31-3-'13

Profit and Loss Account (Partial) for the year ending on 31-3-'14

Balance Sheet (Partial) as on 31-3-'14

In simple words: For this problem, we began by calculating the machine's full initial cost. Then, we figured out how much its value decreased each year using the reducing balance method. After that, we wrote down all the accounting entries and prepared the ledger accounts to clearly show how these changes affected the company's financial records for the first two years.

Exam Tip: Remember that under the reducing balance method, depreciation is calculated on the diminishing book value, not the original cost, each year. Ensure all journal entries correctly reflect the debit to depreciation and credit to the asset or provision account.

 

Question 8. Machine account shows balance of 60,000 in the books of Betul & Company on 1-4-'14. Company provides depreciation at 10 % every year under reducing balance method. This machine was sold at 25% loss on book value on 1-10-'14. From the above information pass necessary journal entries and prepare machine account in the books of company.
Answer:

To accurately prepare the accounts, we first need to determine the selling price of the machine by calculating its book value at the date of sale and then applying the given loss percentage. Once the selling price is known, we can record the necessary journal entries for depreciation, sale, and loss on sale. Finally, we prepare the machine account to show all transactions.

Selling price of the machine:
Balance of Machine A/c on 1-4-'14 \( = \text{Rs. } 60,000 \)
Depreciation for 6 months (1-4-'14 to 1-10-'14) \( = \text{Rs. } 60,000 \times \frac{10}{100} \times \frac{6}{12} = \text{Rs. } 3,000 \)
Book value of machine on 1-10-'14 \( = \text{Rs. } 60,000 - \text{Rs. } 3,000 = \text{Rs. } 57,000 \)
Loss at 25% on book value \( = \text{Rs. } 57,000 \times \frac{25}{100} = \text{Rs. } 14,250 \)
Selling price of the machine sold \( = \text{Rs. } 57,000 - \text{Rs. } 14,250 = \text{Rs. } 42,750 \)

Journal Entries of Betul & Company

Ledger of Betul & Company Machine Account

In simple words: This problem required us to calculate depreciation for a machine up to its sale date, figure out the loss on sale, and then create journal entries to record these transactions. We also prepared the machine account to show the movement of the asset's value until it was sold.

Exam Tip: When an asset is sold mid-year, calculate depreciation only for the period it was used in that year. Ensure to record the selling price, the book value at the time of sale, and any resulting profit or loss.

 

Question 9. Sudhanshu Limited has purchased one machine for Rs. 22,200 on 1-4-'12, its installation expense was of 1800. Another second machine was purchased on 1-10-'13 for 20,400 and its installation expense paid 1,200. Every year, company provides depreciation at 10 % under reducing balance method. On 31-3-'15 first machine was sold at 20 % loss of its book value. From the above information pass journal entries, prepare machine account and depreciation account for first three years and show accounting effect in annual accounts.
Answer:

This problem involves managing two machines, including purchases, depreciation, and the sale of one machine. We need to calculate the cost price and depreciation for each machine, then determine the selling price for the first machine. All these calculations will be used to create journal entries, prepare ledger accounts (machine and depreciation), and show the accounting effects in the annual accounts over three years.

1. Selling price of the first machine:
Cost price of first machine on 1-4-'12 \( = \text{Rs. } 22,200 + \text{Rs. } 1,800 = \text{Rs. } 24,000 \)
Depreciation at 10% for first year \( = \text{Rs. } 2,400 \)
Book value / Balance of machine on 1-4-'13 \( = \text{Rs. } 24,000 - \text{Rs. } 2,400 = \text{Rs. } 21,600 \)
Depreciation at 10% for second year \( = \text{Rs. } 2,160 \)
Book value / Balance of machine on 1-4-'14 \( = \text{Rs. } 21,600 - \text{Rs. } 2,160 = \text{Rs. } 19,440 \)
Depreciation at 10% for third year \( = \text{Rs. } 1,944 \)
Book value / Balance of machine on 31-3-'15 \( = \text{Rs. } 19,440 - \text{Rs. } 1,944 = \text{Rs. } 17,496 \)
Loss at 20% on book value of \( \text{Rs. } 17,496 = \text{Rs. } 17,496 \times \frac{20}{100} = \text{Rs. } 3,499 \)
Selling price of machine sold \( = \text{Rs. } 17,496 - \text{Rs. } 3,499 = \text{Rs. } 13,997 \)

2. Calculation of depreciation for the second machine:
Cost price of second machine on 1-10-'13 \( = \text{Rs. } 20,400 + \text{Rs. } 1,200 = \text{Rs. } 21,600 \)
Depreciation at 10% for 6 months for first year \( = \text{Rs. } 21,600 \times \frac{10}{100} \times \frac{6}{12} = \text{Rs. } 1,080 \)
Book value / Balance of machine on 1-4-'14 \( = \text{Rs. } 21,600 - \text{Rs. } 1,080 = \text{Rs. } 20,520 \)
Depreciation at 10% for second year \( = \text{Rs. } 2,052 \)
Book value / Balance of machine on 31-3-'15 \( = \text{Rs. } 20,520 - \text{Rs. } 2,052 = \text{Rs. } 18,468 \)

Journal Entries of Sudhanshu Limited

Ledger of Sudhanshu Limited Machine Account

In simple words: This solution tracks the lifespan of two different machines within a business. It details when they were bought, how their value decreased over time (depreciation), and calculates the final selling price for the first machine, including any loss incurred. All these financial movements are recorded in the company's books through journal entries and ledger accounts.

Exam Tip: When multiple machines are involved, treat each as a separate asset for depreciation calculation. Pay close attention to the purchase and sale dates to ensure depreciation is computed for the correct period, especially with the reducing balance method.

 

Question 10. Bhalchandra Manufacturing Limited has purchased one machine for Rs. 73,000 on 1-4-12. Its installation expense was of Rs. 2,000. It was decided to provide depreciation at 8 % under straight-line method. Company records depreciation by creating depreciation provisions. From the above information pass journal entries, prepare depreciation provision account, depreciation account for first two years in the books of company.
Answer:

To address this problem, we first calculate the total cost of the machine and its annual depreciation using the straight-line method. Since the company uses the provision method for depreciation, we will prepare journal entries to reflect this, and then create the depreciation provision account and the depreciation account. Finally, we will show the accounting effects in the annual financial statements for the first two years.

Calculations:
Cost price of machine purchased on 1-4-'12 \( = \text{Rs. } 73,000 + \text{Rs. } 2,000 = \text{Rs. } 75,000 \)
Annual depreciation D \( = \text{C} \times \frac{\text{R}}{100} = \text{Rs. } 75,000 \times \frac{8}{100} = \text{Rs. } 6,000 \)
Every year, the amount of depreciation under straight-line method stays the same: Rs. 6,000.

Journal Entries of Bhalchandra Manufacturing Limited

Ledger of Bhalchandra Manufacturing Limited Depreciation Provision Account (Accumulated Depreciation Account)

Ledger of Bhalchandra Manufacturing Limited Depreciation Account

In simple words: This solution showed how to account for a machine using the depreciation provision method. We calculated the fixed annual depreciation, recorded it through journal entries, and then tracked it in separate provision and depreciation accounts. This method keeps the original cost of the asset on the balance sheet while accumulating depreciation in a separate account.

Exam Tip: When using the depreciation provision method, the asset account maintains its original cost. Depreciation is credited to a 'Depreciation Provision Account' (or 'Accumulated Depreciation Account') and debited to 'Depreciation Account'. The Depreciation Account is then closed by transferring its balance to the Profit and Loss Account.

 

Question 11. Jenet Limited has purchased one machine for Rs. 78,000 on 1-4-'13. Its installation expense was of Rs. 2,000. On this machine depreciation is to be provided at 10% under reducing balance method. This depreciation is to be recorded by creating depreciation provision account (Accumulated depreciation account). From the given information, pass journal entries of first two years and show its accounting effect in annual accounts of first two years in the books of company.
Answer:

To solve this problem, we first determine the total cost of the machine and then calculate the annual depreciation for the first two years using the reducing balance method. Since the company uses an accumulated depreciation account, we will prepare the necessary journal entries to record both the depreciation and its transfer to the profit and loss account. Finally, we show how these entries affect the annual accounts for the first two years.

Calculation of annual depreciation under reducing balance method:
Cost price of purchased machine on 1-4-'13 \( = \text{Rs. } 78,000 + \text{Rs. } 2,000 = \text{Rs. } 80,000 \)
Depreciation at 10% for first year (2013-'14) \( = \text{Rs. } 8,000 \)
Book value / Balance of machine on 1-4-'14 \( = \text{Rs. } 80,000 - \text{Rs. } 8,000 = \text{Rs. } 72,000 \)
Depreciation at 10% for second year (2014-'15) \( = \text{Rs. } 7,200 \)
Book value / Balance of machine on 1-4-'15 \( = \text{Rs. } 72,000 - \text{Rs. } 7,200 = \text{Rs. } 64,800 \)

Journal Entries of Jenet Limited

Effect in Annual Accounts

Profit and Loss Account (Partial) for the year ending on 31-3-'14

Balance Sheet (Partial) as on 31-3-'14

Profit and Loss Account (Partial) for the year ending on 31-3-'15

Balance Sheet (Partial) as on 31-3-'15

In simple words: This problem required us to calculate depreciation for a machine over two years using the reducing balance method and a special 'provision' account. We started with the machine's total cost, then figured out how its value decreased each year. All these changes were recorded in the company's journal and shown in the yearly financial reports.

Exam Tip: For the reducing balance method, the depreciation amount decreases each year as it's calculated on the asset's current book value. When using a provision account, the original asset cost remains unchanged, and accumulated depreciation is tracked in a separate ledger.