Samacheer Kalvi Class 11 Accountancy Solutions Chapter 10 Depreciation Accounting

I. Multiple Choice Questions

Choose the correct answer.

 

Question 1. Under straight line method, the amount of depreciation is
(a) Increasing every year
(b) Decreasing every year
(c) Constant for all the years
(d) Fluctuating every year
Answer: (c) Constant for all the years
In simple words: The straight line method always charges the same amount of depreciation each year. This makes it simple to calculate.

🎯 Exam Tip: Remember that "straight line method" implies a consistent, unchanging amount of depreciation over the asset's useful life.

 

Question 2. If the total charge of depreciation and maintenance cost are considered, the method that provides a uniform charge is
(a) Straight line method
(b) Diminishing balance method
(c) Annuity method
(d) Insurance policy method
Answer: (b) Diminishing balance method
In simple words: The diminishing balance method makes sure that when you add depreciation and maintenance costs together, the total cost for the asset stays roughly the same each year. It balances out the higher maintenance costs in later years with lower depreciation.

🎯 Exam Tip: The diminishing balance method is often preferred for assets that require increasing maintenance as they age, as it provides a more even overall expense. Remember that higher depreciation is charged in earlier years and less in later years.

 

Question 3. Under the written down value method of depreciation, the amount of depreciation is
(a) Uniform in all the years
(b) Decreasing every year
(c) Increasing every year
(d) None of the options
Answer: (b) Decreasing every year
In simple words: In the written down value method, depreciation is calculated on the asset's current book value, which gets smaller each year. Because the base amount keeps decreasing, the depreciation amount also decreases over time.

🎯 Exam Tip: The key characteristic of the written down value method is that the depreciation expense reduces each year, reflecting the reducing value and benefit derived from the asset as it ages.

 

Question 4. Depreciation provided on machinery is debited to
(a) Depreciation account
(b) Machinery account
(c) Trading account
(d) Provision for depreciation account
Answer: (a) Depreciation account
In simple words: When a business records depreciation for a machine, the amount is first put into a special account called the "Depreciation Account." This helps track the expense of the asset losing value.

🎯 Exam Tip: Always remember that depreciation is an expense. According to accounting principles, all expenses are debited, so depreciation is always debited to the Depreciation Account.

 

Question 5. Cash received from sale of fixed asset is credited to
(a) Profit and loss account
(b) Fixed asset account
(c) Depreciation account
(d) Bank account
Answer: (b) Fixed asset account
In simple words: When a company sells an old asset, the money received from the sale is recorded in the "Fixed Asset Account." This helps update the value of the asset.

🎯 Exam Tip: The Fixed Asset Account shows the actual value of the asset. When an asset is sold, its value needs to be removed from this account, and the cash received needs to be recorded, usually by crediting the asset account.

 

Question 6. Depreciation is provided on
(a) Fixed assets
(b) Current assets
(c) Outstanding charges
(d) All assets
Answer: (a) Fixed assets
In simple words: Depreciation is only calculated for long-lasting items like buildings or machines that a business uses for many years. These are called fixed assets.

🎯 Exam Tip: Depreciation applies specifically to tangible fixed assets that lose value over time due to use or obsolescence. Current assets, like inventory, are not depreciated.

 

Question 7. Depreciation is caused by
(a) Lapse of time
(b) Usage
(c) Obsolescence
(d) a, b and c
Answer: (d) a, b and c
In simple words: Assets lose value over time because they get older (lapse of time), they get used a lot (usage), or newer and better versions come out (obsolescence). All these things cause depreciation.

🎯 Exam Tip: Understand the various factors contributing to depreciation. It's a combination of physical wear, the mere passage of time, and becoming outdated by newer technology or methods.

 

Question 8. Depreciation is the process of
(a) Allocation of cost of the asset to the period of its useful life
(b) Valuation of assets
(c) Maintenance of an asset in a state of efficiency
(d) Adding value to the asset
Answer: (a) Allocation of cost of the asset to the period of its useful life
In simple words: Depreciation is a way to spread out the total cost of an asset over the years it will be used. Instead of putting the whole cost in one year, it divides the cost fairly across all the years the asset provides benefit.

🎯 Exam Tip: The core idea of depreciation is cost allocation, not asset valuation. It matches the cost of using an asset with the revenue it helps generate over its lifespan.

 

Question 9. For which of the following assets, the depletion method is adopted for writing off cost of the asset?
(a) Plant and machinery
(b) Mines and quarries
(c) Buildings
(d) Trademark
Answer: (b) Mines and quarries
In simple words: The depletion method is used for natural resources like mines and quarries. As the resources are taken out, the value of the asset goes down, and that reduction is called depletion.

🎯 Exam Tip: Remember that depletion is a specific type of depreciation applied to natural resources, reflecting the exhaustion of the resource itself.

 

Question 10. A depreciable asset may suffer obsolescence due to
(a) Passage of time
(b) Wear and tear
(c) Technological changes
(d) None of the options
Answer: (c) Technological changes
In simple words: An asset becomes obsolete when newer, better technology makes it less useful, even if it's still working fine. This often happens because of new inventions.

🎯 Exam Tip: Obsolescence means an asset becomes outdated, not necessarily worn out. New technology is a primary cause, making older assets less efficient or desirable.

 

Question 11. Which method shall be efficient, if repairs and maintenance cost of an asset increases as it grows older.
(a) Straight line method
(b) Reducing balance method
(c) Sinking fund method
(d) Annuity method
Answer: (b) Reducing balance method
In simple words: When an asset gets older and needs more money spent on repairs, the reducing balance method works best. It charges more depreciation when the asset is new and less when it's old, helping to balance the total cost (depreciation + repairs) each year.

🎯 Exam Tip: The reducing balance method aims to equalize the combined burden of depreciation and maintenance expenses over the asset's life, which is ideal when maintenance costs rise with age.

 

Question 12. Depreciation is to be calculated from the date when
(a) Asset is put to use
(b) Purchase order is made
(c) Asset is received at business premises
(d) Invoice of assets is received
Answer: (a) Asset is put to use
In simple words: We start counting depreciation on an asset from the day it actually begins to be used in the business. It's about when it starts helping the business earn money, not just when it's bought or delivered.

🎯 Exam Tip: Depreciation reflects the consumption of an asset's economic benefits. Therefore, it's logical to begin charging depreciation only when the asset is ready and available for its intended use.

 

Question 13. If the rate of depreciation is same, then the amount of depreciation under straight line method vis-a-written down value method will be
(a) Equal in all years
(b) Equal in the first year but higher in subsequent years
(c) Equal in the first year but lower in subsequent years
(d) Lower in the first year but equal in subsequent years.
Answer: (b) Equal in the first year but higher in subsequent years
In simple words: If both methods use the same depreciation rate, the amount of depreciation will be the same in the very first year. But after that, the straight line method will show more depreciation each year compared to the written down value method because it always calculates on the original cost.

🎯 Exam Tip: Understand that the written down value method applies the rate to a decreasing balance, while the straight line method applies it to the original cost. This causes the straight line method to typically result in higher depreciation in later years compared to the written down value method, assuming the same rate.

 

Question 14. Residual value of an asset means the amount that it can fetch on sale at the _____ of its useful life.
(a) Beginning
(b) End
(c) Middle
(d) None
Answer: (b) End
In simple words: The residual value (also called scrap value) is how much money you expect to get for an asset when you sell it after you've used it up completely, at the end of its working life.

🎯 Exam Tip: Residual value is a critical component in depreciation calculation, as it represents the estimated salvage value of an asset at the end of its useful economic life.

 

II. Very Short Answer Type Questions

 

Question 1. What is meant by depreciation?
Answer: Depreciation is the process of spreading the cost of a fixed asset over its entire useful life. It means allocating the expense of using an asset against the benefits it provides during each accounting period. This helps match the asset's cost with the income it generates.
In simple words: Depreciation is how we spread the cost of a big item, like a machine, over all the years we use it. It shows how much value the item loses each year.

🎯 Exam Tip: When defining depreciation, emphasize it as an "allocation of cost" rather than a "valuation" process, and mention its purpose of matching expenses with revenue.

 

Question 2. List out the various methods of depreciation.
Answer: The different ways to calculate depreciation include:

• Straight line method (also called Fixed installment method or Original cost method)
• Written down value method (also called Diminishing balance method)
• Sum of years of digits method
• Machine hour rate method
• Depletion method
• Annuity method
• Revaluation method
• Sinking fund method
• Insurance policy method

There are several methods, and the choice depends on the asset type and business policy.
In simple words: There are many ways to figure out how much an asset loses value. Some common ones are the straight line way, the written down value way, and methods for natural resources like depletion.

🎯 Exam Tip: When listing methods, remember to categorize them and briefly know the core principle of each, especially the straight line and written down value methods.

 

Question 3. Give the formula to find out the amount and rate of depreciation under straight line method of depreciation.
Answer: Under the straight line method, the formulas are:
Amount of depreciation per year \( = \frac { \text{Original cost of the asset} - \text{Estimated scrap value} }{ \text{Estimated useful life of the asset in years} } \)
Rate of depreciation \( = \frac { \text{Amount of depreciation per year} }{ \text{Original cost} } \times 100 \)
These formulas help in systematically reducing the asset's value over its usage.
In simple words: To find yearly depreciation, subtract the asset's expected sale price from its original cost, then divide by how many years it will be used. To find the rate, divide the yearly depreciation by the original cost and multiply by 100.

🎯 Exam Tip: Clearly state both formulas and ensure all terms are correctly represented, especially for MathJax expressions. Remember to use "Original cost" for the rate calculation denominator.

 

Question 4. What is annuity method?
Answer: The annuity method for depreciation considers not only the original cost of the asset but also the interest that could have been earned if the money invested in the asset was invested elsewhere. It's based on the idea that if the money used to buy the asset had been invested, it would have generated interest. So, this method calculates depreciation by including this theoretical interest, which is usually found using an annuity table or a specific formula. This ensures that the true cost of the asset, including its opportunity cost of capital, is accounted for.
In simple words: The annuity method calculates depreciation by adding the normal asset cost to the money the business could have earned if it had invested the asset's cost somewhere else. It accounts for "lost" interest.

🎯 Exam Tip: Remember the core concept of the annuity method: it treats the investment in an asset as if it were an annuity, factoring in the interest that could have been earned on the capital invested.

 

Question 5. What is sinking fund method?
Answer: The sinking fund method of depreciation is used when a business wants to ensure it has enough money to replace an asset at the end of its useful life, not just write off its value. Under this method, a fixed amount of money (equal to the depreciation charge) is regularly transferred to a special fund and invested outside the business. These investments then earn interest, and by the time the asset needs replacing, the fund has grown enough through contributions and interest to cover the cost of a new asset. This method is particularly useful for expensive assets. It helps in proactively planning for future asset replacements.
In simple words: The sinking fund method sets aside money each year to replace an asset later. The money is invested outside the business, so it earns more money, making sure there's enough cash to buy a new asset when the old one wears out.

🎯 Exam Tip: Highlight that the sinking fund method's primary goal is to accumulate funds for replacement, not just to allocate cost. Mention that the depreciation amount is invested externally.

 

III. Short Answer Questions

 

Question 1. What are the objectives of providing depreciation?
Answer: The main goals of calculating depreciation are:
1. To find the true profit: Depreciation helps match the cost of using an asset with the income it helps generate. By including this expense, businesses can accurately determine their real production cost and profit or loss for each accounting period.
2. To show a true financial picture: Charging depreciation reduces the value of fixed assets on the balance sheet. This means the financial statements show a more accurate and fair view of the company's financial health, reflecting the actual reduced value of its assets.
3. To help replace fixed assets: When depreciation is recorded, an equal amount of money is either kept in the business or invested. This reserve of funds ensures that when an asset reaches the end of its useful life, the business has the resources available to purchase a new one without needing to take out a loan or use other capital.
4. To get tax benefits: According to tax laws, depreciation is an allowable expense. By deducting depreciation from their income, businesses can reduce their taxable profits, which then lowers the amount of tax they have to pay.
5. To follow legal rules: Many laws, like the Indian Companies Act, 2013, require companies to provide depreciation on their fixed assets before doing things like declaring dividends. This ensures that financial reporting meets all legal requirements. The purpose is to reflect the true consumption of economic benefits of assets.
In simple words: Depreciation helps a company find its real profit, shows the true value of its assets, saves money for new machines, reduces taxes, and follows legal rules.

🎯 Exam Tip: When asked for objectives, remember to cover the financial reporting aspect (true profit/position), the operational aspect (asset replacement), and the regulatory/tax aspect.

 

Question 2. What are the causes for depreciation?
Answer: Depreciation, or the reduction in an asset's value, occurs due to several reasons:
1. Wear and Tear: This is the physical damage or deterioration of an asset that happens from regular use, exposure to the environment, or being idle. For example, a machine's parts can wear out over time. Its value decreases proportionally with the wear.
2. Effluxion of Time (Passage of Time): Some assets lose value simply because time passes, regardless of whether they are used or not. For example, a patent or a leasehold property loses value as its legal term expires. Even if an asset isn't used much, its age makes it less useful.
3. Obsolescence: This happens when an asset becomes outdated or less efficient because new, improved alternatives are available. It's not about physical wear but about economic or technological factors. For example, an older computer model becomes obsolete when newer, faster ones are released, even if the old computer still works.
4. Inadequacy for the purpose: An asset might become insufficient for a company's needs due to growth or changes in operations. For instance, a small machine might become inadequate if the production capacity needs to expand significantly.
5. Lack of maintenance: Poor or insufficient maintenance can accelerate the wear and tear of an asset, leading to a faster decline in its useful life and value.
6. Abnormal factors: Unexpected events like accidents (fire, floods), natural calamities, or unforeseen damage can cause a sudden and significant reduction in an asset's value, sometimes leading to it being discarded completely.
In simple words: Assets lose value because they wear out from use, time passes, new technology makes them old-fashioned, they become too small for the job, they're not taken care of, or they get damaged by accidents.

🎯 Exam Tip: Differentiate between physical causes (wear and tear, abnormal factors) and economic/time-related causes (obsolescence, effluxion of time, inadequacy). Provide a brief, clear example for each cause.

 

Question 3. State the advantages and limitations of straight line method or depreciation.
Answer: The straight line method of depreciation has several advantages and limitations:
Advantages:
(a) Simple and easy to understand: This method is very straightforward to calculate. It uses a fixed amount of depreciation each year, which makes it simple for anyone to understand and apply.
(b) Equality of depreciation burden: The same amount of depreciation is charged to the profit and loss account every year. This ensures that the annual profit is affected equally by depreciation, providing a consistent view.
(c) Assets can be completely written off: If an asset has no scrap value (meaning it cannot be sold for anything at the end of its life), its book value can be reduced to zero using this method. If there is scrap value, it can be written down to that exact amount.
(d) Suitable for assets with a fixed working life: This method is best for fixed assets that have a clear and predictable working life. It's easy to estimate the useful life and, consequently, the rate of depreciation.
Limitations:
(a) Ignores the actual use of the asset: This method charges a fixed amount of depreciation regardless of how much the asset is actually used. An asset might be heavily used in one year and lightly used in another, but the depreciation expense remains the same, which might not accurately reflect its wear.
(b) Ignores the interest factor: The straight line method does not consider the "opportunity cost" of the money invested in the asset. It doesn't account for the interest that could have been earned if the initial investment had been placed elsewhere.
(c) Total charge on the assets will be more when the asset becomes older: This method does not account for the increasing repair and maintenance costs that typically occur as an asset ages. When you add the constant depreciation to rising maintenance costs, the total expense burden can be unevenly distributed over the asset's life. The combined cost of depreciation and maintenance is lower in initial years and higher in later years. The method does not focus on equalizing the total annual expense.
(d) Difficulty in determining scrap value: It can be quite challenging to accurately estimate the scrap value (what the asset can be sold for) at the very end of its long useful life. This uncertainty can affect the accuracy of the depreciation calculation.
In simple words: The straight line method is easy to use and charges the same amount each year, which means assets can be fully written off. But it doesn't care how much the asset is actually used, doesn't think about lost interest from the money invested, and doesn't balance the rising repair costs as the asset gets old. Also, guessing its end sale value can be hard.

🎯 Exam Tip: When discussing advantages, focus on simplicity and consistency. For limitations, highlight the method's failure to account for varying usage, opportunity cost of capital, and increasing repair expenses over time.

 

Question 4. State the advantages and limitations of written down value method of depreciation.
Answer: The written down value method (also known as the diminishing balance method) has its own set of advantages and limitations:
Advantages:
(a) Equal Charge against income: In the early years, when an asset is new, its maintenance costs are usually low. This method charges higher depreciation in these early years. As the asset gets older, maintenance costs increase, but depreciation charges decrease. This balances the total burden (depreciation + repairs) on the company's profit and loss account, making it roughly equal each year.
(b) Logical Method: This method is considered logical because an asset is generally more productive and provides more benefits in its earlier years. Therefore, charging more depreciation when the asset is most useful aligns with the principle of matching expenses to revenue. In later years, when productivity might be less, the depreciation charged is also less.
Limitations:
(a) Assets cannot be completely written off: A significant limitation of this method is that the book value of an asset can never be reduced to zero, even if it becomes completely obsolete or useless. There will always be a small balance remaining in the asset account because depreciation is always calculated on a reducing balance.
(b) Ignores the interest factor: Similar to the straight line method, this method does not take into account the interest that could have been earned if the capital invested in the asset had been put to an alternative use. The opportunity cost of the investment is not considered.
(c) Difficulty in determining the rate of depreciation: Setting the correct rate of depreciation for this method can be challenging. The rate is usually kept higher to ensure that a substantial portion of the asset's value is written off within its useful life, especially since it can never reach zero.
(d) Ignores the actual use of the asset: This method provides a fixed rate of depreciation on the written down value, without considering how much the asset is actually used during a specific period. This means that if an asset is used more or less in a particular year, the depreciation amount doesn't change based on that usage.
In simple words: The written down value method helps balance yearly costs because it charges more depreciation when the asset is new (and repairs are low), and less when it's old (and repairs are high). It's logical because assets are most useful when new. However, the asset's value can never reach zero, it doesn't count lost interest, finding the right depreciation rate can be hard, and it doesn't look at how much the asset is actually used.

🎯 Exam Tip: For advantages, focus on the equalization of total expense (depreciation + maintenance) and the logical allocation of cost. For limitations, remember the inability to write off an asset to zero and the challenge in determining the appropriate depreciation rate.

 

Question 5. Distinguish between straight line method and written down value method of providing depreciation.
Answer: Here's a comparison between the straight line method and the written down value method of depreciation:

Both methods are used to allocate asset costs, but they do so differently, suiting various asset types and business contexts.
In simple words: The straight line method always uses the original cost for depreciation, so the amount is the same each year and the asset can be written off completely. The written down value method uses the reduced value each year, so the depreciation amount gets smaller, and the asset never fully reaches zero value.

🎯 Exam Tip: When distinguishing between these two fundamental methods, focus on their calculation basis (original cost vs. written down value), the pattern of depreciation amount over time, and their suitability for different asset characteristics.

 

IV. Exercises

Straight Line Method:

 

Question 1. A firm purchased plant for Rs. 40,000. Erection charges amounted to Rs. 2,000. Effective life of the plant is 5 years. Calculate the amount of depreciation per year under straight line method.
Answer:
To find the total cost of the asset, we add the purchase price and the erection charges:
Original Cost \( = \) Purchase price \( + \) Erection charges
\( = \) Rs. \( 40,000 + \) Rs. \( 2,000 \)
\( = \) Rs. \( 42,000 \)

Now, we calculate the annual depreciation using the formula for the straight line method:
Amount of depreciation per year \( = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)
In this case, the scrap value is not mentioned, so it is assumed to be zero.
Amount of depreciation \( = \frac{42,000}{5} \)
\( = \) Rs. \( 8,400 \)
Therefore, the depreciation per year is Rs. 8,400. This method ensures an equal charge to profit and loss each year.
In simple words: First, add the buying cost and setup cost to get the total cost. Then, divide this total cost by how many years the plant will be useful. This gives you the amount of money the plant loses in value each year.

🎯 Exam Tip: Remember to always include all costs incurred to bring an asset to its working condition (like erection charges or installation fees) in its original cost before calculating depreciation.

 

Question 2. A company purchased a building for Rs. 50,000. The useful life of the building is 10 years and the residual value is Rs. 2,000. Find out the amount and rate of depreciation under straight line method.
Answer:
First, we calculate the amount of depreciation per year:
Amount of depreciation per year \( = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)
\( = \frac{50,000 - 2,000}{10} \)
\( = \frac{48,000}{10} \)
\( = \) Rs. \( 4,800 \)

Next, we calculate the rate of depreciation:
Rate of depreciation \( = \frac{\text{Amount of depreciation per year}}{\text{Original cost}} \times 100 \)
\( = \frac{4,800}{50,000} \times 100 \)
\( = 9.6\% \)
So, the annual depreciation is Rs. 4,800, and the depreciation rate is 9.6%. This helps in systematically reducing the asset's value over its useful life.
In simple words: To find the yearly depreciation, subtract the scrap value from the original cost and divide by the useful life. To find the rate, divide the yearly depreciation by the original cost and multiply by 100.

🎯 Exam Tip: Always deduct the scrap value from the original cost before dividing by the useful life to get the annual depreciation amount for the straight line method.

 

Question 3. Furniture was purchased for Rs. 60,000 on 1-7-2016. It is expected to last for 5 years. Estimated scrap at the end of five years is Rs. 4,000. Find out the rate of depreciation under straight line method.
Answer:
First, we calculate the amount of depreciation per year:
Amount of depreciation per year \( = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)
\( = \frac{60,000 - 4,000}{5} \)
\( = \frac{56,000}{5} \)
\( = \) Rs. \( 11,200 \)

Next, we calculate the rate of depreciation:
Rate of depreciation \( = \frac{\text{Amount of depreciation per year}}{\text{Original cost}} \times 100 \)
\( = \frac{11,200}{60,000} \times 100 \)
\( = 18.67\% \)
The annual depreciation is Rs. 11,200, and the rate is 18.67%. This calculation helps businesses understand the true cost of using an asset over time.
In simple words: Subtract the scrap value from the purchase price, then divide by the years of life to get yearly depreciation. Then, divide this yearly amount by the purchase price and multiply by 100 to get the depreciation rate.

🎯 Exam Tip: Pay attention to the purchase date only if the question asks for depreciation for a partial year. When finding the rate, always use the *original cost* in the denominator, not the depreciated value.

 

Question 4. Calculate the rate of depreciation under straight line method from the following information Purchased a second hand machinery on 1.1.2018 for Rs. 38,000 On 1.1.2018 spent Rs. 12,000 on its repairs Expected useful life of machine is 4 years Estimated residual value Rs. 6,000
Answer:
First, we determine the total original cost of the asset. This includes the purchase price and all expenses incurred to make it ready for use.
Original cost \( = \) Purchase price \( + \) Repairs
\( = \) Rs. \( 38,000 + \) Rs. \( 12,000 \)
\( = \) Rs. \( 50,000 \)

Next, we calculate the amount of depreciation per year:
Amount of depreciation per year \( = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)
\( = \frac{50,000 - 6,000}{4} \)
\( = \frac{44,000}{4} \)
\( = \) Rs. \( 11,000 \)

Finally, we calculate the rate of depreciation:
Rate of depreciation \( = \frac{\text{Amount of depreciation per year}}{\text{Original cost}} \times 100 \)
\( = \frac{11,000}{50,000} \times 100 \)
\( = 22\% \)
The annual depreciation is Rs. 11,000, and the rate is 22%. It is important to capitalize all initial expenses to accurately reflect the asset's value.
In simple words: First, add the buying cost and repair cost to get the total cost of the machine. Then, find the yearly depreciation by taking this total cost, subtracting the scrap value, and dividing by the years it will be useful. Finally, divide the yearly depreciation by the total cost and multiply by 100 to get the percentage rate.

🎯 Exam Tip: For second-hand assets, any initial repair costs that make the asset usable should be added to its purchase price to determine the total original cost for depreciation calculations.

 

Question 5. Calculate the rate of depreciation under straight line method. Purchase price of a machine Rs. 80,000 Expenses to be capitalized 20,000 Estimated residual value Rs. 4,000 Expected useful life 4 years
Answer:
First, we determine the total original cost of the asset. Capitalized expenses are added to the purchase price.
Original cost \( = \) Purchase price \( + \) Expenses to be Capitalized
\( = \) Rs. \( 80,000 + \) Rs. \( 20,000 \)
\( = \) Rs. \( 1,00,000 \)

Next, we calculate the amount of depreciation per year:
Amount of depreciation per year \( = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)
\( = \frac{1,00,000 - 4,000}{4} \)
\( = \frac{96,000}{4} \)
\( = \) Rs. \( 24,000 \)

Finally, we calculate the rate of depreciation:
Rate of depreciation \( = \frac{\text{Amount of depreciation per year}}{\text{Original cost}} \times 100 \)
\( = \frac{24,000}{1,00,000} \times 100 \)
\( = 24\% \)
The annual depreciation is Rs. 24,000, and the rate is 24%. This rate helps in matching the asset's cost with the revenue it helps generate.
In simple words: Add the machine's buying price and any extra costs to get its full original price. Then, subtract the residual value and divide by how many years it will be used to find the yearly depreciation. Divide this yearly amount by the full original price and multiply by 100 to get the depreciation rate.

🎯 Exam Tip: Capitalized expenses are costs that increase the value or life of an asset, making it ready for use, and are added to the asset's cost, not treated as regular expenses.

 

Question 6. Machinery was purchased on 1st January 2015 for Rs. 4,00,000. Rs. 15,000 was spent on its erection and Rs. 10,000 on its freight charges. Depreciation is charged at 10% per annum on straight line method. The books are closed on 31st March each year. Calculate the amount of depreciation on machinery for the first two years.
Answer:
First, calculate the total original cost of the machinery:
Original cost \( = \) Purchase price \( + \) Erection charges \( + \) Freight charges
\( = \) Rs. \( 4,00,000 + \) Rs. \( 15,000 + \) Rs. \( 10,000 \)
\( = \) Rs. \( 4,25,000 \)

Depreciation is charged at 10% per annum using the straight line method. This means the depreciation amount is 10% of the original cost each year.

**Calculation of Depreciation:**
For the first year (January 1, 2015 to March 31, 2015): This is for 3 months.
Depreciation \( = 10\% \) of Rs. \( 4,25,000 \) for \( \frac{3}{12} \) months
\( = 4,25,000 \times \frac{10}{100} \times \frac{3}{12} \)
\( = \) Rs. \( 10,625 \)

For the second year (April 1, 2015 to March 31, 2016): This is for a full year.
Depreciation \( = 10\% \) of Rs. \( 4,25,000 \)
\( = 4,25,000 \times \frac{10}{100} \)
\( = \) Rs. \( 42,500 \)

Here is a summary of the calculation on the amount of depreciation on machinery for the first two years:

In simple words: First, add up the buying cost, setup cost, and shipping cost to get the total machine price. Then, for the first year, calculate 10% of this total for only the months the machine was used. For the second year, calculate 10% of the total price for the whole year. These are your depreciation amounts.

🎯 Exam Tip: When the accounting period is different from the asset's purchase date, remember to calculate depreciation for a partial period (pro-rata) in the first and last years of the asset's life.

 

Question 7. An asset is purchased on 1.1.2016 for Rs. 25,000. Depreciation is to be provided annually according to straight line method. The useful life of the asset is 10 years and its residual value is Rs. 1,000. Accounts are closed on 31st December every year. You are required to find out the rate of depreciation and give journal entries for first two years.
Answer:
First, we calculate the amount of depreciation per year:
Amount of depreciation per year \( = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)
\( = \frac{25,000 - 1,000}{10} \)
\( = \frac{24,000}{10} \)
\( = \) Rs. \( 2,400 \)

Next, we calculate the rate of depreciation:
Rate of depreciation \( = \frac{\text{Amount of depreciation per year}}{\text{Original cost}} \times 100 \)
\( = \frac{2,400}{25,000} \times 100 \)
\( = 9.6\% \)

Here are the journal entries for the first two years:

The journal entries record the asset purchase, annual depreciation, and transfer of depreciation to the profit and loss account. This shows how the asset's value decreases over time and affects the company's profit.
In simple words: First, calculate the yearly depreciation by subtracting the scrap value from the original cost and dividing by the years it will be useful. Then, find the depreciation rate by dividing this yearly amount by the original cost and multiplying by 100. Finally, record when the machine was bought, when its value went down each year (depreciation), and when that depreciation was moved to the profit and loss account.

🎯 Exam Tip: Remember that "Depreciation A/C" is a nominal account, so its balance is transferred to the Profit and Loss Account at the end of each accounting period.

 

Question 8. From the following particulars, give journal entries for 2 years and prepare machinery account under straight line method of providing depreciation: Machinery was purchased on 1.1.2016 Price of the machine Rs. 36,000 Freight charges Rs. 2,500 Installation charges Rs. 1,500 Life of the machine 5 years
Answer:
First, we calculate the total original cost of the machine:
Original cost \( = \) Purchase price \( + \) Freight charges \( + \) Installation charges
\( = \) Rs. \( 36,000 + \) Rs. \( 2,500 + \) Rs. \( 1,500 \)
\( = \) Rs. \( 40,000 \)

Next, we calculate the annual depreciation amount:
Amount of depreciation per year \( = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)
In this case, the scrap value is not given, so we assume it is zero.
Amount of depreciation \( = \frac{40,000}{5} \)
\( = \) Rs. \( 8,000 \)

Then, we calculate the rate of depreciation:
Rate of depreciation \( = \frac{\text{Amount of depreciation per year}}{\text{Original cost}} \times 100 \)
\( = \frac{8,000}{40,000} \times 100 \)
\( = 20\% \)

**Journal Entries:**

**Machinery Account:**

These entries and the machinery account reflect the purchase of the machine, the annual depreciation, and the closing balances. It is important to treat all costs to make the asset ready for use as part of its original cost. This ensures the correct depreciation is calculated each year.
In simple words: First, add the machine's price, shipping, and installation costs to get its full original price. Then, calculate how much its value drops each year by dividing this total cost by its useful life. Make journal entries for buying the machine, its yearly value drop, and moving this drop to the profit report. Also, create a machinery account to show its value changing over the years.

🎯 Exam Tip: When preparing the Machinery Account, debit the asset's original cost (including all acquisition and installation charges) and credit the annual depreciation amount each year, before bringing down the closing balance.

 

Question 9. A manufacturing company purchased on 1 April, 2010, a plant and machinery for Rs. 4,50,000 and spent Rs. 50,000 on its installation. After having used it for three years, it was sold for Rs. 3,85,000. Depreciation is to be provided every year at the rate of 15% per annum on the fixed installment method. Accounts are closed on 31st March every year. Calculate profit or loss on sale of machinery.
Answer:
First, we calculate the total original cost of the plant and machinery:
Cost of plant & machinery \( = \) Purchase price \( + \) Installation charges
\( = \) Rs. \( 4,50,000 + \) Rs. \( 50,000 \)
\( = \) Rs. \( 5,00,000 \)

Next, we calculate the depreciation for each year at 15% per annum on the original cost (fixed installment method).
Annual Depreciation \( = 15\% \) of Rs. \( 5,00,000 \)
\( = 5,00,000 \times \frac{15}{100} \)
\( = \) Rs. \( 75,000 \)

**Calculation of Profit or Loss on Sale of Machinery:**

Profit on sales \( = \) Sale price \( - \) Book value
\( = \) Rs. \( 3,85,000 - \) Rs. \( 2,75,000 \)
\( = \) Rs. \( 1,10,000 \)
The company made a profit of Rs. 1,10,000 on the sale of the machinery. This indicates a successful disposal of the asset after its period of use.
In simple words: Add the machine's buying price and setup cost to get its total original value. Then, subtract the fixed yearly depreciation for each year it was used to find its value before selling. Compare this value to how much it was sold for to see if the company made a profit or loss.

🎯 Exam Tip: When calculating profit or loss on the sale of an asset, always compare the selling price with the *book value* of the asset on the date of sale, after deducting all accumulated depreciation.

 

Question 10. On 1st April 2008, Sudha and Company purchased machinery for Rs. 64,000. To instal the machinery expenses incurred was Rs. 28,000. Depreciate machinery 10% p.a. under straight line method. On 30th June, 2010 the worn out machinery was sold for Rs. 52,000. The books are closed on 31st December every year. Show machinery account.
Answer:
First, calculate the total original cost of the machinery:
Original cost \( = \) Purchase price \( + \) Installation expenses
\( = \) Rs. \( 64,000 + \) Rs. \( 28,000 \)
\( = \) Rs. \( 92,000 \)

Annual depreciation \( = 10\% \) of Rs. \( 92,000 \)
\( = \) Rs. \( 9,200 \)

**Depreciation for specific periods:**
2008 (April 1 to Dec 31, 9 months) \( = 9,200 \times \frac{9}{12} = \) Rs. \( 6,900 \)
2009 (Full year) \( = \) Rs. \( 9,200 \)
2010 (Jan 1 to June 30, 6 months) \( = 9,200 \times \frac{6}{12} = \) Rs. \( 4,600 \)

**Machinery Account:**

**Calculation of Profit/Loss on Sale:**
Book value on 1.1.2010 \( = \) Rs. \( 75,900 \)
Less: Depreciation for 6 months (Jan 1 - June 30, 2010) \( = \) Rs. \( 4,600 \)
Book value on sale date (June 30, 2010) \( = \) Rs. \( 71,300 \)
Selling price \( = \) Rs. \( 52,000 \)
Loss on sale \( = \) Book value \( - \) Selling price
\( = \) Rs. \( 71,300 - \) Rs. \( 52,000 \)
\( = \) Rs. \( 19,300 \)
The machinery account clearly shows how the asset's value decreases over time due to depreciation, and the loss incurred from its sale. This is essential for accurate financial reporting.
In simple words: First, add the buying price and installation costs to get the machine's full original price. Calculate how much its value drops each year (10% of the original price). Since the machine was bought and sold mid-year, calculate depreciation only for the months it was owned. Show all these changes in a Machinery Account, which is like a record book for the machine's value. Finally, work out if the company made money or lost money when selling the old machine by comparing its selling price to its value on the day it was sold.

🎯 Exam Tip: Always remember to adjust depreciation calculations for partial periods in the year of purchase and year of sale if the books are not closed on the same date as the transaction.

 

Question 11. Ragul purchased machinery on April 1, 2014 for Rs. 2,00,000. On 1st October 2015, a new machine costing Rs. 1,20,000 was purchased. On 30th September 2016, the machinery purchased on April 1, 2014 was sold for Rs. 1,20,000. Books of accounts are closed on 31st March and depreciation is to be provided at 10% p.a. on straight line method. Prepare machinery account and depreciation account for the years 2014-15 to 2016-17.
Answer:
**Machinery Account**

**Depreciation Account**

These accounts track the purchase of multiple machines, their depreciation over time, and the sale of one machine. Accurately recording these transactions ensures that the company's financial statements reflect the true value of its assets and its profitability. The straight-line method simplifies depreciation calculation, making it easier to manage.
In simple words: Keep a record of all machines bought and sold in the Machinery Account. For each year, calculate the depreciation for each machine based on its original cost and how long it was used during that year. Also, create a separate Depreciation Account to show the total depreciation for each period. Remember to handle part-year calculations carefully for new purchases or sales.

🎯 Exam Tip: When multiple assets are purchased or sold within an accounting period, calculate depreciation separately for each asset and for the exact duration it was held, especially when the accounting period does not align with the purchase/sale date.

 

Question 12. An asset is purchased for Rs. 50,000. The rate of depreciation is 15% p.a. Calculate the annual depreciation for the first two years under diminishing balance method.
Answer:
Under the diminishing balance method, depreciation is calculated on the reducing book value of the asset each year.

**First Year Depreciation:**
Cost of the asset on 1.1.2015 \( = \) Rs. \( 50,000 \)
Depreciation for 1st year (15% of Rs. 50,000) \( = 50,000 \times \frac{15}{100} = \) Rs. \( 7,500 \)
Book value at the end of 1st year \( = 50,000 - 7,500 = \) Rs. \( 42,500 \)

**Second Year Depreciation:**
Depreciation for 2nd year (15% of Rs. 42,500) \( = 42,500 \times \frac{15}{100} = \) Rs. \( 6,375 \)
Book value at the end of 2nd year \( = 42,500 - 6,375 = \) Rs. \( 36,125 \)
The diminishing balance method results in higher depreciation in earlier years and lower depreciation in later years. This aligns with assets losing more value when they are new.
In simple words: For the first year, calculate 15% of the machine's original price. Subtract this amount to get its new value. For the second year, calculate 15% of this new, lower value. This way, the depreciation amount gets smaller each year.

🎯 Exam Tip: In the diminishing balance method, always calculate depreciation on the *book value* (cost minus accumulated depreciation) at the beginning of the year, not the original cost.

 

Question 13. A boiler was purchased on 1st January 2015 from abroad for Rs. 10,000. Shipping and forwarding charges amounted to Rs. 12,000. Import duty Rs. 7,000 and expenses of installation amounted to Rs. 1,000. Calculate depreciation for the first 3 years @10% p.a. on diminishing balance method assuming that the accounts are closed 31st December each year.
Answer:
First, calculate the total original cost of the assets:
Cost of the assets \( = \) Purchase price \( + \) Shipping and forwarding charges \( + \) Import duty \( + \) Installation charges
\( = \) Rs. \( 10,000 + \) Rs. \( 2,000 + \) Rs. \( 7,000 + \) Rs. \( 1,000 \)
\( = \) Rs. \( 20,000 \)

Depreciation is calculated at 10% p.a. using the diminishing balance method.

**Calculation of Depreciation:**
**Year 1: 2015**
Cost of the assets on 1.1.2015 \( = \) Rs. \( 20,000 \)
Less: Depreciation for 2015 (10% on Rs. 20,000) \( = \) Rs. \( 2,000 \)
Book value on 31.12.2015 \( = \) Rs. \( 18,000 \)

**Year 2: 2016**
Book value on 1.1.2016 \( = \) Rs. \( 18,000 \)
Less: Depreciation for 2016 (10% on Rs. 18,000) \( = \) Rs. \( 1,800 \)
Book value on 31.12.2016 \( = \) Rs. \( 16,200 \)

**Year 3: 2017**
Book value on 1.1.2017 \( = \) Rs. \( 16,200 \)
Less: Depreciation for 2017 (10% on Rs. 16,200) \( = \) Rs. \( 1,620 \)
Book value on 31.12.2017 \( = \) Rs. \( 14,580 \)
The total cost includes all expenses to bring the asset to its intended use, and the diminishing balance method applies a consistent rate to the decreasing value, providing a realistic view of the asset's worth.
In simple words: First, add up all costs like buying, shipping, import duty, and installation to get the total cost of the boiler. For the first year, calculate 10% depreciation on this total cost. For the second year, calculate 10% on the boiler's value *after* the first year's depreciation. Do the same for the third year, calculating 10% on the value left after the second year's depreciation.

🎯 Exam Tip: Always sum up all expenses incurred to get an asset ready for use (purchase price, freight, import duty, installation) to determine its total original cost before calculating depreciation.

 

Question 14. A furniture costing Rs. 5,000 was purchased on 1.1.2016, the installation charges being 1,000. The furniture is to be depreciated @10% p.a. on the diminishing balance method. Pass journal entries for the first two years.
Answer:
First, calculate the total original cost of the furniture:
Original cost \( = \) Purchase price \( + \) Installation charges
\( = \) Rs. \( 5,000 + \) Rs. \( 1,000 \)
\( = \) Rs. \( 6,000 \)

Depreciation is 10% p.a. on the diminishing balance method. Accounts are closed on 31st December each year.

**Year 1: 2016**
Depreciation for 2016 (10% of Rs. 6,000) \( = \) Rs. \( 600 \)
Book value on 31.12.2016 \( = 6,000 - 600 = \) Rs. \( 5,400 \)

**Year 2: 2017**
Depreciation for 2017 (10% of Rs. 5,400) \( = \) Rs. \( 540 \)
Book value on 31.12.2017 \( = 5,400 - 540 = \) Rs. \( 4,860 \)

**Journal Entries:**

These journal entries show the purchase of the furniture, how its value decreased each year (depreciation), and how that depreciation affected the company's profit and loss. It demonstrates the proper accounting treatment for fixed assets and their gradual loss of value.
In simple words: First, add the buying price and installation costs to get the furniture's total value. Then, calculate 10% depreciation on this value for the first year. For the second year, calculate 10% depreciation on the value left after the first year. Write down these steps as journal entries to record the furniture purchase and its value loss each year.

🎯 Exam Tip: When making journal entries for depreciation under the diminishing balance method, always debit the Depreciation Account and credit the Asset Account (or Provision for Depreciation Account) with the calculated depreciation for that period.

 

Question 15. A firm acquired a machine on 1st April 2015 at a cost of Rs. 50,000. Its life is 6 years. The firm writes off depreciation @ 30% p.a. on the diminishing balance method. The firm closes its books on 31st December every year. Show the machinery account and depreciation account for three years starting from 1st April 2015.
Answer:
Depreciation rate: 30% p.a. on diminishing balance method.
Accounts are closed on 31st December every year.

**Year 1: 2015 (April 1 to Dec 31 - 9 months)**
Cost of machine on 1.4.2015 \( = \) Rs. \( 50,000 \)
Depreciation for 2015 \( = 50,000 \times \frac{30}{100} \times \frac{9}{12} = \) Rs. \( 11,250 \)
Book value on 31.12.2015 \( = 50,000 - 11,250 = \) Rs. \( 38,750 \)

**Year 2: 2016 (Full Year)**
Depreciation for 2016 \( = 38,750 \times \frac{30}{100} = \) Rs. \( 11,625 \)
Book value on 31.12.2016 \( = 38,750 - 11,625 = \) Rs. \( 27,125 \)

**Year 3: 2017 (Full Year)**
Depreciation for 2017 \( = 27,125 \times \frac{30}{100} = \) Rs. \( 8,137.5 \approx \) Rs. \( 8,138 \)
Book value on 31.12.2017 \( = 27,125 - 8,138 = \) Rs. \( 18,987 \)

**Machinery Account**

**Depreciation Account**

These accounts accurately reflect the machine's acquisition and the consistent application of depreciation over its useful life, showing the declining balance as per the chosen method. Accounting for partial years is crucial for correct financial statements.
In simple words: First, calculate how much the machine loses value each year (depreciation) using the diminishing balance method, starting from its buying price. Remember to calculate depreciation for only the months the machine was used in the first year. Then, create two records: a Machinery Account to show the machine's value changing over time and a Depreciation Account to show the yearly depreciation amounts.

🎯 Exam Tip: When using the diminishing balance method, always ensure depreciation is calculated on the *opening book value* of the asset for that financial year, and adjust for partial periods if the asset is purchased or sold mid-year.

 

Question 16. A firm purchased a machine for Rs. 1,00,000 on 1-7-2015. Depreciation is written off at 20% on reducing balance method. The firm closes its books on 31st December each year. Show the machinery account upto 31-12-2017.
Answer:

Calculation of Depreciation:
Cost of Machinery on 1.7.2015 = Rs. 1,00,000

Depreciation for 2015 (July 1 to Dec 31, 6 months): Rs. 5,000
Book Value on 31.12.2015: Rs. 1,00,000 - Rs. 5,000 = Rs. 95,000

Depreciation for 2016 (full year): Rs. 9,500
Book Value on 31.12.2016: Rs. 95,000 - Rs. 9,500 = Rs. 85,500

Depreciation for 2017 (full year): Rs. 8,550
Book Value on 31.12.2017: Rs. 85,500 - Rs. 8,550 = Rs. 76,950

Machinery Account

Depreciation Account

In simple words: This shows how a machine's value goes down over three years. We calculated how much value it lost each year and created accounting records (Machinery Account and Depreciation Account) to track these changes, following the reducing balance method.

🎯 Exam Tip: Remember to apply the reducing balance method correctly by calculating depreciation on the asset's book value (remaining value) at the start of each year, not its original cost.

 

Question 17. On 1st October 2014, a truck was purchased for Rs. 8,00,000 by Laxmi Transports Ltd. Depreciation was provided @ 15% p.a. under diminishing balance method. On 31st March 2017, the above truck was sold for Rs. 5,00,000. Accounts are closed on 31st March every year. Find out the profit or loss made on the sale of the truck.
Answer:

Calculation of Profit (or) Loss on sale of assets:

In simple words: This shows how to figure out if a company made a profit or loss when selling a truck. We first calculate the truck's value each year after taking off depreciation. When the truck is sold, we compare its final value with the selling price to see if there was a profit or a loss. Here, the company sold the truck for less than its value, resulting in a loss.

🎯 Exam Tip: When calculating depreciation for a partial year, always make sure to correctly prorate the annual depreciation amount based on the number of months the asset was used.

 

Question 18. On 1st January 2015, a second hand machine was purchased for Rs. 58,000 and Rs. 2,000 was spent on its repairs. On 1st July 2017, it was sold for Rs. 28,600. Prepare the machinery account for the years 2011 to 2013 under written down value method by assuming the rate of depreciation as 10% p.a. and the accounts are closed on 31st December every year.
Answer:

Calculation of profit or loss on sales of machinery:
Cost of Machine = Purchase price + Repairs = Rs. 58,000 + Rs. 2,000 = Rs. 60,000

Depreciation for 2015 (at 10% on Rs. 60,000): Rs. 6,000
Book Value on 31.12.2015: Rs. 60,000 - Rs. 6,000 = Rs. 54,000

Depreciation for 2016 (at 10% on Rs. 54,000): Rs. 5,400
Book Value on 31.12.2016: Rs. 54,000 - Rs. 5,400 = Rs. 48,600

Depreciation for 2017 (for 6 months, Jan 1 to July 1): Rs. 2,430
Book Value on 1.7.2017: Rs. 48,600 - Rs. 2,430 = Rs. 46,170

Selling Price on 1.7.2017: Rs. 28,600
Loss on Sale: Rs. 46,170 - Rs. 28,600 = Rs. 17,570

Machinery Account

In simple words: This account tracks the value of a machine bought in 2015, including repair costs. It shows how its value decreased each year due to depreciation and the final loss made when it was sold in 2017. The records help in understanding the machine's true cost over its usage period.

🎯 Exam Tip: Always include initial installation or repair charges in the original cost of the asset before calculating depreciation, as these costs prepare the asset for use.

 

Question 19. Raj & Co purchased a machine on 1st January 2014 for Rs. 90,000. On 1st July 2014, they purchased another machine for Rs. 60,000. On 1st January 2015, they sold the machine purchased on 1st January 2014 for Rs. 40,000. It was decided that the machine be depreciated at 10% per annum on diminishing balance method. Accounts are closed on 31st December every year. Show the machinery account for the years 2014 and 2015.
Answer:

Calculations:

1st Machinery:
Cost Price on 1.1.2014: Rs. 90,000
Depreciation for 2014 (10% on Rs. 90,000): Rs. 9,000
Book Value on 31.12.2014: Rs. 90,000 - Rs. 9,000 = Rs. 81,000
Selling Price on 1.1.2015: Rs. 40,000
Loss on Sale: Rs. 81,000 - Rs. 40,000 = Rs. 41,000

2nd Machinery:
Cost Price on 1.7.2014: Rs. 60,000
Depreciation for 2014 (10% on Rs. 60,000 for 6 months): Rs. 3,000
Book Value on 31.12.2014: Rs. 60,000 - Rs. 3,000 = Rs. 57,000
Depreciation for 2015 (10% on Rs. 57,000): Rs. 5,700
Book Value on 31.12.2015: Rs. 57,000 - Rs. 5,700 = Rs. 51,300

Machinery Account

In simple words: This account tracks two machines bought by Raj & Co. It shows their purchase, yearly depreciation (value loss), and the sale of the first machine, including the loss made on that sale. The diminishing balance method means more depreciation is charged in the early years.

🎯 Exam Tip: When multiple assets are purchased or sold within the same accounting period, ensure each transaction is correctly recorded and depreciation is calculated for the exact period of usage for each asset.

11th Accountancy Guide Depreciation Accounting Additional Important Questions and Answers

I. Choose the correct answer.

 

Question 1. Depreciation is calculated on _______ under diminishing balance method.
(a) Original Cost
(b) Written Down Value
(c) The Scrap Value
(d) None of the options
Answer: (b) Written Down Value
In simple words: When you use the diminishing balance method, you calculate depreciation on the asset's value after deducting previous depreciation, not on its first cost. This means the depreciation amount gets smaller each year.

🎯 Exam Tip: Always remember that the key difference in the diminishing balance method is applying the depreciation rate to the asset's current book value, not its initial cost.

 

Question 2. Sinking Fund is also known as _______.
(a) Depletion Method
(b) Annuity method
(c) Depreciation Fund method
(d) None of the options
Answer: (c) Depreciation Fund method
In simple words: The Sinking Fund method is another name for the Depreciation Fund method. Both methods involve setting aside money regularly to replace an asset at the end of its useful life.

🎯 Exam Tip: Know the alternative names for depreciation methods, as questions might use different terminology to test your understanding.

 

Question 3. The process of becoming out of date or obsolete is termed as _______.
(a) Depletion
(b) Physical Deterioration
(c) Obsolescence
(d) None of the options
Answer: (c) Obsolescence
In simple words: When something becomes old-fashioned or no longer useful because newer, better things are available, that process is called obsolescence. It means it's outdated, even if it still works.

🎯 Exam Tip: Distinguish obsolescence (outdated due to technology/trends) from physical deterioration (wear and tear from use).

 

Question 4. In the process of provision method of depreciation the asset always valued at _______.
(a) Market Price
(b) Cost Price
(c) Scrap Value
(d) None
Answer: (b) Cost Price
In simple words: When using the provision method for depreciation, the asset is always shown in the books at its original purchase price. A separate account tracks the total depreciation. This keeps the initial cost visible.

🎯 Exam Tip: With the provision for depreciation method, the asset account itself is not reduced; instead, accumulated depreciation is shown separately.

 

Question 5. Meaning of Salvage value is _______.
(a) Cash to be paid when asset is disposed off
(b) Estimated disposal value
(c) Definite sale price of the asset
(d) Cash to be received when life of the asset ends
Answer: (b) Estimated disposal value
In simple words: Salvage value means the amount of money you expect to get when you sell an asset after its useful life is finished. It's an estimate of what the asset will be worth as scrap or for parts.

🎯 Exam Tip: Salvage value (or scrap value) is an estimate, not a definite price, and helps determine the total depreciable amount of an asset.

 

Question 6. In the accounting records, the fixed assets are normally recorded _______.
(a) At Cost
(b) At Book Value
(c) At Scrap Value
(d) At replacement value
Answer: (a) At Cost
In simple words: In accounting books, fixed assets are usually listed at their original purchase price. This is because we record their actual cost when they are bought.

🎯 Exam Tip: The historical cost principle requires assets to be recorded at their original purchase price, which remains their recorded value on the balance sheet, adjusted by depreciation.

 

Question 7. A fixed asset was bought for Rs. 5,000. Its accumulated depreciation is Rs. 1,000 and rate of depreciation is 10%. What are the depreciation expenses for the current accounting period using reducing balance method?
(a) Rs. 600
(b) Rs. 2000
(c) Rs. 500
(d) Rs. 400
Answer: (c) Rs. 500
In simple words: Depreciation is the amount by which an asset loses value over time. For this asset, the depreciation expense for the current period is Rs. 500. This amount is subtracted from the asset's value.

🎯 Exam Tip: For numerical MCQs, carefully check if the given information (like accumulated depreciation) is directly used in the calculation according to the specified method.

 

Question 8. Under which depreciation method the amount of depreciation expenses remains same throughout the useful life of a fixed asset _______.
(a) Straight Line Method
(b) Reducing Balance Method
(c) Number of Units produced method
(d) Machine hour method
Answer: (a) Straight Line Method
In simple words: The straight line method calculates the same depreciation amount every single year for an asset. It makes the value decrease equally over its whole useful life.

🎯 Exam Tip: Recognize that the straight line method is characterized by a constant annual depreciation charge, making it easy to calculate and understand.

 

Question 9. The book value of machinery on 01.04.2016 was Rs. 70,000. Depreciation is charged at 10% p.a under Written Down value method on 31st March every year. The machine was sold for Rs. 50,000 on 01.8.2017;calculate the Profit/Loss on sale of machinery.
(a) Profit Rs. 5,755
(b) Profit Rs. 5,000
(c) Profit Rs. 10,375
(d) Loss Rs. 10,325
Answer: (c) Profit Rs. 10,375
In simple words: When a machine is sold, we compare its current value in the company's books to the price it was sold for. If the selling price is higher than the book value, it's a profit; if lower, it's a loss. Here, the sale resulted in a profit.

🎯 Exam Tip: Always calculate the asset's written down value up to the date of sale, carefully accounting for any partial year depreciation, before determining profit or loss.

 

Question 10. The objectives of providing depreciation on an asset are _______.
(a) To ascertain the true profit/loss of the firm
(b) To provide funds for the replacement of the fixed assets
(c) To show the true financial position of the firm
(d) All of the options
Answer: (d) All of the options
In simple words: Charging depreciation helps a business in many ways. It helps them find their real profit or loss, saves money to buy new assets later, and makes sure their financial reports show a true picture of the company's health.

🎯 Exam Tip: Understand that depreciation serves multiple critical accounting purposes, including accurate financial reporting, cost allocation, and capital preservation.

 

Question 11. Cost of an asset is Rs. 3,00,000. Rate of depreciation is 10% on WDV method. Value of the asset at the end of the second year will be _______.
(a) Rs. 2,70,000
(b) Rs. 30,000
(c) Rs. 2,50,000
(d) Rs. 2,43,000
Answer: (d) Rs. 2,43,000
In simple words: After one year, the asset's value drops by 10%. In the second year, it drops by another 10% from its already reduced value. So, after two years, its total value will be Rs. 2,43,000.

🎯 Exam Tip: For the Written Down Value (WDV) method, ensure you calculate depreciation on the *reduced* book value of the asset each year, not the original cost.

 

Question 12. Depletion method of charging depreciation is adopted for which of the following assets?
(a) Plant and Machinery
(b) Buildings
(c) Wasting assets like mines and quarries
(d) Trademarks
Answer: (c) Wasting assets like mines and quarries
In simple words: The depletion method is used for natural resources that get used up over time, like coal from a mine or oil from a well. As these resources are extracted, their value goes down.

🎯 Exam Tip: Remember that depletion is a specific form of depreciation used for natural resources, reflecting the exhaustion of the resource itself.

 

Question 13. A trader followed WDV method of depreciation; the book value of assets after 4 years is 24% of original cost. Find rate of depreciation _______.
(a) 24%
(b) 26%
(c) 32%
(d) 30%
Answer: (d) 30%
In simple words: This question asks for the yearly rate at which an asset loses value when using the written down value method. If after four years it is worth only 24% of its original price, the yearly depreciation rate must be 30%.

🎯 Exam Tip: For compound depreciation calculations over multiple years, especially when finding the rate, use the formula for future value with a depreciating asset: \( \text{WDV} = \text{Original Cost} \times (1 - \text{Rate})^\text{Years} \).

 

Question 14. The older name of Straight line method is _______.
(a) Annuity method
(b) Revaluation method
(c) Fixed Installment method
(d) None
Answer: (c) Fixed Installment method
In simple words: The Straight Line Method of depreciation is also known as the Fixed Installment Method. This is because it charges the same, fixed amount of depreciation every year.

🎯 Exam Tip: Familiarize yourself with all common names for depreciation methods, as they are often used interchangeably in exams.

 

Question 15. Exhaustion is a _______ for depreciation.
(a) Cause
(b) Non-Cause
(c) Both (a) & (b)
(d) None
Answer: (a) Cause
In simple words: Exhaustion is one of the reasons why an asset loses value, leading to depreciation. It happens when a natural resource, like an oil reserve, is used up over time.

🎯 Exam Tip: Exhaustion is a specific cause of depreciation related to the consumption of natural resources, often linked to the depletion method.

 

Question 16. Under which method of depreciation, interest is also taken into consideration?
(a) Revaluation method
(b) Depletion method
(c) Annuity method
(d) None of the options
Answer: (c) Annuity method
In simple words: The Annuity method of depreciation considers not only the cost of the asset but also the interest that could have been earned if the money invested in the asset was invested somewhere else. It treats the asset investment like a loan that earns interest.

🎯 Exam Tip: The Annuity method is unique for factoring in the opportunity cost of capital (interest) when calculating annual depreciation, making it more complex than simpler methods.

 

Question 17. For oil wells _______ method of depreciation is to be followed.
(a) Exhaustion
(b) Wear & Tear
(c) Depletion
(d) None of the options
Answer: (a) Exhaustion
In simple words: For resources like oil wells, the method used to account for their decrease in value is called exhaustion. This happens as the resource is extracted and used up.

🎯 Exam Tip: Exhaustion and depletion are terms often used for natural resources; remember they signify the reduction in value as the resource is consumed.

 

Question 18. Depreciation arises due to the following reason _______.
(a) Wear & Tear
(b) Fall in the market value
(c) Effluxion of time
(d) All of the options
Answer: (d) All of the options
In simple words: Assets lose value for many reasons, including getting old from use (wear and tear), becoming less valuable in the market, or simply because time passes. All these factors contribute to depreciation.

🎯 Exam Tip: Be aware of the various causes of depreciation, as they help explain why asset values decline over time, encompassing both physical and economic factors.

 

Question 19. When the value of fixed assets increases it is known as _______.
(a) Depreciation
(b) Appreciation
(c) Depletion
(d) None
Answer: (b) Appreciation
In simple words: When a fixed asset's value goes up, it is called appreciation. This is the opposite of depreciation, where the asset's value goes down.

🎯 Exam Tip: Understand that appreciation is the increase in an asset's value, which is not usually accounted for in the same way as depreciation on the balance sheet for fixed assets.

 

Question 20. Depreciation on fixed assets is _______ expenditure.
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Deferred Revenue expenditure
(d) None
Answer: (b) Capital Expenditure
In simple words: Depreciation itself is an expense, but it is charged against the value of fixed assets, which are capital expenditures. It represents the wearing out of those larger, long-term investments.

🎯 Exam Tip: While depreciation is a revenue expense charged to the profit and loss account, it is a charge against the *cost* of a capital asset, representing the systematic allocation of that capital cost over time.

II. Short Answer Questions

 

Question 1. Define Depreciation.
Answer: Depreciation refers to the process of recognizing the reduced usefulness of a fixed asset over time. According to Spicer and Pegler, it measures how much of an asset's useful life has been consumed during a certain period, for any reason. R.N. Carter describes it as a steady and lasting drop in an asset's value from various causes. This accounting practice helps businesses spread the cost of an asset over the years it provides benefits.
In simple words: Depreciation means that the value of an asset goes down over time because it gets old, wears out, or becomes less useful. It helps businesses show the true cost of using their assets each year.

🎯 Exam Tip: When defining depreciation, include its core concept of allocating asset cost over its useful life and mention common causes like wear and tear or obsolescence.

 

Question 2. What is 'residual value'?
Answer: Residual value, also known as scrap value, is the estimated amount a company expects to get from selling an asset at the end of its useful life. To calculate this value, any costs related to removing and selling the asset should be subtracted from its total expected sale price. This value is important because it helps businesses calculate the total amount of depreciation an asset will experience over its lifetime.
In simple words: Residual value is the money you expect to get for an asset after it's no longer useful to your business. It's like the selling price of an old item.

🎯 Exam Tip: Clearly state that residual value is an *estimated* amount and specify that it's realized at the *end* of an asset's useful life.

 

Question 3. What is 'Obsolescence'?
Answer: Obsolescence occurs when an asset loses value because newer and better alternatives become available. This often happens due to new inventions and technological advancements. Even if the old asset is still in working condition, users prefer the updated versions, causing the older asset to lose its appeal and value. For example, the latest computers make older models less desirable. It shows that an asset's value isn't just about its physical wear, but also how relevant it remains in a changing market.
In simple words: Obsolescence is when an asset becomes outdated and loses value because newer, more advanced versions are created. It means something is old-fashioned, even if it still works.

🎯 Exam Tip: Emphasize that obsolescence makes an asset undesirable even if physically functional, driven by technological changes or shifts in demand.

 

Question 4. Write notes on 'Effluxion of time'.
Answer: Effluxion of time refers to the reduction in an asset's usefulness and value simply due to the passage of time, regardless of whether it is actively used or not. For example, licenses, patents, or leases expire after a set period, automatically decreasing their value. This type of depreciation highlights that some assets have a natural lifespan that cannot be extended.
In simple words: Effluxion of time means an asset loses value just because time passes, not because it's being used. Like a temporary license that expires.

🎯 Exam Tip: Note that 'effluxion of time' is a cause of depreciation that occurs even if the asset is idle, typically affecting assets with a defined legal or economic lifespan.

 

Question 5. What is 'Straight Line Method' of depreciation?
Answer: The Straight Line Method is a way to calculate depreciation where the same amount of an asset's cost is deducted each year. This is done by applying a fixed percentage to the original cost of the asset every year. Because the depreciation amount is constant, this method is also known as the Fixed Installment Method. If you draw a graph of the depreciation charged each year, it forms a straight horizontal line. This method is simple to understand and is often used for assets that lose value evenly over their useful life.
In simple words: The Straight Line Method is a simple way to subtract the same amount of an asset's value each year until it reaches its final worth. It spreads the cost evenly over the asset's life.

🎯 Exam Tip: Highlight that the Straight Line Method results in a constant annual depreciation charge, applied to the asset's original cost less its estimated scrap value.

 

Question 6. What is’Written down value'of depreciation?
Answer: The Written Down Value (WDV) method calculates depreciation by applying a fixed percentage to the asset's remaining value each year, not its original cost. The written down value is the original cost minus all the depreciation charged in previous years. Because the amount of depreciation decreases over time, this method is also known as the Diminishing Balance Method or Reducing Installment Method. This method reflects that assets often lose more value in their early years and less as they get older.
In simple words: The Written Down Value method calculates how much an asset loses value each year based on its current, reduced value, not its original price. So, the depreciation amount gets smaller every year.

🎯 Exam Tip: Emphasize that under the WDV method, the depreciation charge decreases each year because it's calculated on the asset's progressively lower book value.

 

Question 7. What is 'Revaluation method' of depreciation?
Answer: The Revaluation Method calculates depreciation by comparing an asset's value at the start of the year with its value at the end of the year. Experts often help determine the asset's value at the year's end. The difference between the beginning and ending value is recorded as the depreciation for that specific year. This method is commonly used for small, easily valued assets like livestock or loose tools. This approach is very practical for assets whose value can change quickly due to market conditions or physical state.
In simple words: The Revaluation method figures out how much an asset lost value by looking at its worth at the start and end of the year. The difference is the depreciation.

🎯 Exam Tip: Remember that the Revaluation Method is best suited for assets where individual value changes are significant and frequent, like livestock or small tools.

 

Question 8. What is 'Insurance policy method' of depreciation?
Answer: In the Insurance Policy Method of depreciation, a company buys an insurance policy for an amount equal to what it would cost to replace the asset later. Each year, the amount of depreciation is effectively paid as an insurance premium to the insurance company. When the policy matures, the company receives money from the insurance company, which is then used to buy a new asset. This method helps a business save up funds to replace assets, ensuring funds are available when needed.
In simple words: With the Insurance Policy Method, a company pays money to an insurance company each year. This money acts like depreciation, and when the policy ends, the company gets funds to buy a new asset.

🎯 Exam Tip: The Insurance Policy Method serves a dual purpose: it provides for depreciation and ensures funds are available for asset replacement at the end of its useful life.

 

Question 9. What are the factors determining the amount of depreciation?
Answer: The amount of depreciation is affected by several important factors:
(i) Actual cost of the asset:

• The actual cost is the total money spent to get or build the asset.
• This includes the original purchase or construction cost, also known as historical cost.
• It also covers all extra costs like shipping fees, loading charges, setting up the asset, and even expenses for test runs. These costs make the asset ready to use.
• If the asset is second-hand, any initial repair costs to make it useable are also part of its actual cost. Assets need to be fully ready for their intended use before depreciation begins.

(ii) Estimated useful life of the asset:

• The estimated useful life is how long a business expects to use an asset.
• This life can be measured in years, or based on the number of products it can make or how many hours it can be used.
• For things like patents or copyrights, their legal life is used as their estimated useful life.
• The Indian Companies Act, 2013, has guidelines for how long certain fixed assets, like plant and machinery, are considered useful for depreciation calculations.

(iii) Scrap value of an asset:

• The scrap value is the money expected to be received when the asset is sold at the end of its useful life. It is also known as residual value.
• To figure out the exact scrap value, any costs for removing or selling the asset should be subtracted from the total expected sales amount. This helps determine the net amount.

(iv) Other factors: Besides the above mentioned factors, legal provisions, technological factors, etc., also determine the amount of depreciation.
In simple words: How much an asset's value drops over time depends on its starting price, how long it can be used, and how much it can be sold for at the end. Things like new laws or new technology also play a role.

🎯 Exam Tip: Remember that "actual cost" includes all expenses incurred to bring an asset to its working condition, not just the purchase price. Clearly defining these factors is crucial for accurate depreciation calculation.

 

Question 10. What are the Characteristics of depreciation?
Answer: Here are the main characteristics of depreciation:
1. Depreciation is the process of spreading the cost of an asset (capital expenditure) as an expense over its useful life. This is done by charging it to revenue expenditure or the profit and loss account. This allocation helps match expenses with the revenue they generate.
2. It is a process of allocating the asset's cost over its life, not a process of finding its market value. Depreciation focuses on accounting for the cost, not on how much the asset could be sold for today.
3. It reduces the recorded book value of the asset, not its market value. The book value is what the company's records show, while the market value is what buyers would pay.
4. It's a continuous and gradual reduction in the asset's book value throughout its useful life. This means the asset's value slowly decreases each accounting period.
5. Depreciation is usually calculated for tangible fixed assets that lose value over time, such as machinery or buildings. It is generally not applied to intangible assets (like patents) or wasting assets (like mines) which have different accounting treatments.
In simple words: Depreciation means slowly counting part of an asset's cost as an expense each year. It lowers the asset's value in the company's books, but not necessarily its market price. It’s a steady decrease over time for physical things a business owns.

🎯 Exam Tip: Understanding that depreciation is an "allocation of cost" and not a "valuation" is key. Examiners often test this distinction to ensure a clear grasp of the concept.

 

Question 11. Find the amount of depreciation
Cost Price – Rs 28,000 ; Estimated Life – 6 years; Scrap Value Rs 4,000
Answer:
\( \text{Amount of depreciation per year} = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)

\( = \frac{28,000 - 4,000}{6} \)

\( = \frac{24,000}{6} \)

\( = \text{Rs } 4,000 \)
In simple words: To find the annual depreciation, subtract the asset's leftover value from its original cost, then divide that by how many years it will be used. This gives the amount of value lost each year.

🎯 Exam Tip: Always remember to subtract the scrap value before dividing by the useful life to get the correct depreciable amount.

 

Question 12. On 1st January 2016, Anand Ltd., purchased a machine costing Rs 6,000. It is estimated that its working life is four years and it will fetch no scrap value. The company decided to write off depreciation according to the fixed installment method. Prepare the machinery account.
Answer:
\( \text{Amount of depreciation per year} = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)

\( = \frac{6,000 - 0}{4} \)

\( = \text{Rs } 1,500 \)
In simple words: The machine's value goes down by Rs 1,500 each year because it loses all its value over four years and cannot be sold for anything at the end. This is a common way to calculate a steady depreciation.

🎯 Exam Tip: When there's no scrap value, the entire original cost is depreciated over the asset's useful life.

 

Question 13. A company purchased a plant for Rs 2,00,000. The useful life of the asset is 10 years and the scrap value us Rs 40,000. Find the rate of depreciation under the straight line method.
Answer:
First, calculate the amount of depreciation per year:
\( \text{Amount of depreciation per year} = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \)

\( = \frac{2,00,000 - 40,000}{10} \)

\( = \frac{1,60,000}{10} \)

\( = \text{Rs } 16,000 \)

Next, calculate the rate of depreciation:
\( \text{Rate of Depreciation} = \frac{\text{Amount of depreciation per year}}{\text{Original Cost}} \times 100 \)

\( = \frac{16,000}{2,00,000} \times 100 \)

\( = 0.08 \times 100 \)

\( = 8\% \)
In simple words: First, we find out how much value the plant loses each year by subtracting its final scrap value from its starting cost and dividing by its total useful years. Then, we find this annual loss as a percentage of the original cost to get the depreciation rate. This rate shows how much the asset's value decreases each year as a proportion of its initial price.

🎯 Exam Tip: Always calculate the annual depreciation amount first before determining the rate. Remember to use the *original cost* in the denominator when calculating the rate for the straight-line method.

 

III. Long Answer Questions

 

Question 1. Find out the rate of depreciation under straight line method.
Cost of asset – Rs 10,000
Scrap value – Rs 1,000
Estimated Life 10 years
Answer:
First, calculate the amount of depreciation per year:
\( \text{Amount of depreciation} = \frac{\text{Total cost} - \text{Scrap value}}{\text{Estimated life}} \)

\( = \frac{10,000 - 1,000}{10} \)

\( = \frac{9,000}{10} \)

\( = \text{Rs } 900 \)

Next, calculate the rate of depreciation:
\( \text{Rate of depreciation} = \frac{\text{Amount of depreciation}}{\text{Original Cost}} \times 100 \)

\( = \frac{900}{10,000} \times 100 \)

\( = 0.09 \times 100 \)

\( = 9\% \)
In simple words: We first calculate how much the asset loses in value each year by taking its total cost, subtracting what it can be sold for later, and dividing by its expected life. Then, we turn this annual loss into a percentage of its original cost to get the yearly depreciation rate. This rate helps companies understand the consistent wear and tear.

🎯 Exam Tip: Ensure you use the total cost (original cost) in the denominator when calculating the rate, not the depreciable amount. This is a common point of confusion.

 

Question 2. Find out the rate of depreciation under straight line method.
Cost of Plants – Rs 2,30,000
Installation charges – Rs 20,000
Expected Life in year 10 years
Scrap value – Rs 50,000
Answer:
First, calculate the Total Cost of the asset:
\( \text{Total Cost} = \text{Purchase price} + \text{Installation charges} \)

\( = 2,30,000 + 20,000 \)

\( = \text{Rs } 2,50,000 \)

Next, calculate the amount of depreciation per year:
\( \text{Amount of depreciation} = \frac{\text{Total cost} - \text{Scrap value}}{\text{Estimated life}} \)

\( = \frac{2,50,000 - 50,000}{10} \)

\( = \frac{2,00,000}{10} \)

\( = \text{Rs } 20,000 \)

Then, calculate the rate of depreciation:
\( \text{Rate of depreciation} = \frac{\text{Amount of depreciation}}{\text{Original Cost}} \times 100 \)

\( = \frac{20,000}{2,50,000} \times 100 \)

\( = 0.08 \times 100 \)

\( = 8\% \)
In simple words: First, we add up all the costs to get the plant ready, including buying it and setting it up. Then, we find out how much value the plant loses each year by subtracting its final scrap value from its total cost and dividing by its useful life. Finally, we turn this yearly loss into a percentage of the total cost to get the depreciation rate. This rate helps predict the asset's value decline over time.

🎯 Exam Tip: Remember to include installation charges and any other costs to bring the asset to its working condition when calculating the "Total Cost" or "Original Cost" for depreciation purposes.

 

Question 3. A machine was purchased For Rs 2,40,000, on 1.1.2010. This is expected to last for five year. Estimated scrap at the end of given year in Rs 40,000. Find out the rate of depreciation under straight line method.
Answer:
First, calculate the amount of depreciation per year:
\( \text{Amount of depreciation} = \frac{\text{Total cost} - \text{Scrap value}}{\text{Estimated life}} \)

\( = \frac{2,40,000 - 40,000}{5} \)

\( = \frac{2,00,000}{5} \)

\( = \text{Rs } 40,000 \)

Next, calculate the rate of depreciation:
\( \text{Rate of depreciation} = \frac{\text{Amount of depreciation}}{\text{Original Cost}} \times 100 \)

\( = \frac{40,000}{2,40,000} \times 100 \)

\( = 0.1666 \times 100 \)

\( = 16.7\% \)
In simple words: We first figure out how much the machine's value drops each year by subtracting its expected selling price at the end from its original cost, then dividing that by its useful life. After that, we calculate what percentage this yearly loss is of the machine's original purchase price. This gives us the constant rate at which the machine depreciates.

🎯 Exam Tip: Pay close attention to the number of years for the useful life – it's the denominator in the annual depreciation calculation. Rounding to one decimal place for percentages is generally acceptable unless specified otherwise.

 

Question 4. A company has purchased a machinery for Rs 1,70,000 and spent Rs 20,000 for its installation. The estimated life of the machinery is 5 years with a residual value of Rs 15,000. Find out the rate of depreciation under straight line method.
Answer:
First, calculate the Total Cost of the asset:
\( \text{Total Cost} = \text{Purchase price} + \text{Installation charges} \)

\( = 1,70,000 + 20,000 \)

\( = \text{Rs } 1,90,000 \)

Next, calculate the amount of depreciation per year:
\( \text{Amount of depreciation} = \frac{\text{Total cost} - \text{Scrap value}}{\text{Estimated life}} \)

\( = \frac{1,90,000 - 15,000}{5} \)

\( = \frac{1,75,000}{5} \)

\( = \text{Rs } 35,000 \)

Then, calculate the rate of depreciation:
\( \text{Rate of depreciation} = \frac{\text{Amount of depreciation}}{\text{Original Cost}} \times 100 \)

\( = \frac{35,000}{1,90,000} \times 100 \)

\( = 0.1842 \times 100 \)

\( = 18.42\% \)
In simple words: We start by adding the machine's purchase price and installation costs to get its full value. Then, we figure out how much value it loses each year by subtracting its expected sale price at the end from its total cost, and dividing by its useful life. Finally, we convert this yearly loss into a percentage of its total original cost to find the depreciation rate. This ensures all relevant costs are accounted for in the depreciation calculation.

🎯 Exam Tip: Always remember to capitalize installation costs by adding them to the asset's purchase price to determine the total cost for depreciation calculation.

 

Question 5. Monisha Garments purchased a machinery on 1.4.2015 for Rs 2,40,000. After three years the plane was sold for Rs 1,80,000. The firm charges depreciation at the rate of 10% per annum on stright line method. Accounts are closed on 31st march every year. Prepare machinery account and depreciation A/C.
Answer:
(i) Amount of Depreciation = Rs 2,40,000 \( \times \) 10% = Rs 24,000 per year.
(ii) Book value after three years = Original Cost - (Annual Depreciation \( \times \) 3 years)
\( = 2,40,000 - (24,000 \times 3) \)
\( = 2,40,000 - 72,000 \)
\( = \text{Rs } 1,68,000 \)
(iii) Selling price = Rs 1,80,000
Profit on sale of machinery = Selling price - Book value after three years
\( = 1,80,000 - 1,68,000 \)
\( = \text{Rs } 12,000 \)

Machinery Account

Depreciation Account

In simple words: The machine's value goes down by Rs 24,000 each year. After three years, its value in the books would be Rs 1,68,000. Since it was sold for Rs 1,80,000, the company made a profit of Rs 12,000 on the sale. The machinery and depreciation accounts show these yearly changes and the final sale.

🎯 Exam Tip: When preparing accounts for asset sales, always calculate the asset's book value *up to the date of sale* to accurately determine profit or loss.

 

Question 6. Pugazh & CO, purchased a machinery for Rs 4,70,000. On 1.4.2001 they spent Rs 30,000 on the repairs and installed the machinery. Depreciation is written after at 10% p.a on the straight line method on 31.3.2004, the machinery was found unsuitable and sold for Rs 3,50,000. Prepare machinery A/C assuming that the account are closed on 31st march every year.
Answer:
Total cost of machinery = Purchase price + Repairs + Installation charges
Total cost = Rs 4,70,000 + Rs 30,000 = Rs 5,00,000
Annual Depreciation = 10% of Rs 5,00,000 = Rs 50,000
Book value on 31.3.2004 (after 3 years) = Rs 5,00,000 - (Rs 50,000 \( \times \) 3) = Rs 5,00,000 - Rs 1,50,000 = Rs 3,50,000
Selling price = Rs 3,50,000
Profit/Loss on sale = Selling price - Book Value = Rs 3,50,000 - Rs 3,50,000 = Nil (No profit, no loss)

Machinery Account

In simple words: The machine's total cost was Rs 5,00,000 after purchase and setup. Each year, its value went down by Rs 50,000. After three years, its book value was Rs 3,50,000. Since it was sold for the same amount, there was no profit or loss. The machinery account shows how its value changed each year until it was sold.

🎯 Exam Tip: Always remember to add all initial expenses like repairs and installation charges to the purchase price to find the total original cost of the asset before calculating depreciation.

 

Question 7. A Company purchased a machinery on 1,4,2001 for Rs 2,40,000 on 1 October 2002. It purchased another machinery for Rs 60,000. On 1st October 2003, it sold off the first machine purchased on 1.4.20C1 for Rs 1,68,000 on the same date, it purchased another machinery for Rs 1,50,000 Account are clsoed every year on 31st march depredation is written of at 10% p.a on original cost. Prepare machinery account and depreciation account for three years.
Answer:
**I. Machinery purchased on 1.4.2001 for Rs 2,40,000**
Annual Depreciation: 10% of Rs 2,40,000 = Rs 24,000
- For the first year (1.4.2001 - 31.3.2002): Depreciation = Rs 24,000
- For the second year (1.4.2002 - 31.3.2003): Depreciation = Rs 24,000
- For the third year (1.4.2003 - 1.10.2003, for 6 months until sale): Depreciation = Rs 24,000 \( \times \) (6/12) = Rs 12,000
Book value on 1.10.2003 = Original Cost - Total Depreciation till sale
Book value = Rs 2,40,000 - (Rs 24,000 + Rs 24,000 + Rs 12,000) = Rs 2,40,000 - Rs 60,000 = Rs 1,80,000
Selling price = Rs 1,68,000
Loss on sale of machinery = Book value - Selling price = Rs 1,80,000 - Rs 1,68,000 = Rs 12,000

**II. Machinery purchased on 1.10.2002 for Rs 60,000**
Annual Depreciation: 10% of Rs 60,000 = Rs 6,000
- For the second year (1.10.2002 - 31.3.2003, for 6 months): Depreciation = Rs 6,000 \( \times \) (6/12) = Rs 3,000
- For the third year (1.4.2003 - 31.3.2004, for full year): Depreciation = Rs 6,000

**III. Machinery purchased on 1.10.2003 for Rs 1,50,000**
Annual Depreciation: 10% of Rs 1,50,000 = Rs 15,000
- For the third year (1.10.2003 - 31.3.2004, for 6 months): Depreciation = Rs 15,000 \( \times \) (6/12) = Rs 7,500

Machinery Account

Depreciation Account

In simple words: The company bought several machines over time and calculates depreciation at 10% each year using the straight-line method, closing accounts on March 31st. The first machine was sold after three years, resulting in a loss. The machinery account tracks the purchase, sale, and yearly depreciation for each machine, showing the changing value of assets.

🎯 Exam Tip: When dealing with multiple asset purchases and sales, track each asset separately and calculate depreciation based on the exact period it was owned in each financial year.

 

Question 8. A plant is purchased for Rs 90,000, It is depreciation as 10% p.a on reducing balance for the three years. When it becomes obsolute due to new method of production and is scrapped. The scrap produces Rs 66,000 at the end of the thrid year. Prepare plant account for three year.
Answer:
**Calculation of Profit or Loss on Sale of Plant:**

**Plant Account**

In simple words: A plant bought for Rs 90,000 was depreciated by 10% each year using the reducing balance method. After three years, its book value was Rs 65,610. When it was sold for Rs 66,000, the company made a small profit of Rs 390. The plant account shows its declining value over the three years and the final sale transaction.

🎯 Exam Tip: For the reducing balance method, calculate depreciation on the *remaining book value* each year, not the original cost. Always calculate the final book value accurately at the time of sale to determine profit or loss.

 

Question 9. A firm purchased a machine for Rs 1,00,000 on 1-7-2015 depreciation is written off at 10% on reducing balance method. The firm close its book on 31st December each year. Show the machinery account up to 31.12.2017
Answer:
**Year 1 (2015):**
Purchase price: Rs 1,00,000 (on 1-7-2015)
Depreciation for 2015 (July 1 to Dec 31 = 6 months) = Rs 1,00,000 \( \times \) 10% \( \times \) (6/12) = Rs 5,000
Book value on 31.12.2015 = Rs 1,00,000 - Rs 5,000 = Rs 95,000

**Year 2 (2016):**
Depreciation for 2016 (on reducing balance) = Rs 95,000 \( \times \) 10% = Rs 9,500
Book value on 31.12.2016 = Rs 95,000 - Rs 9,500 = Rs 85,500

**Year 3 (2017):**
Depreciation for 2017 (on reducing balance) = Rs 85,500 \( \times \) 10% = Rs 8,550
Book value on 31.12.2017 = Rs 85,500 - Rs 8,550 = Rs 76,950

**Machinery Account**

**Depreciation Account**

In simple words: A machine bought for Rs 1,00,000 is depreciated by 10% each year using the reducing balance method. This means depreciation is calculated on the remaining value, not the original cost. The accounts close on December 31st. The machinery account shows its value decreasing over three years, while the depreciation account records the annual depreciation expense.

🎯 Exam Tip: When using the reducing balance method, always ensure depreciation is calculated on the *net book value* from the previous period, not the original cost, and adjust for partial years of ownership.

 

Question 10. Dhanuja shree started business on 1st April 2001 and she purchased a machinery for Rs 1,40,000. She purchased another machinery on 1st November 2002 costing Rs 30,000. She (adopted a policy of charging 15% p.a depreciation under Diminishing balance method. The account are closed every year on 31st march. Prepare machinery account and depreciation account for the first three years.
Answer:
**I. Machinery purchased on 1.4.2001 for Rs 1,40,000**
Depreciation for 2001-2002 (1.4.2001 to 31.3.2002) = Rs 1,40,000 \( \times \) 15% = Rs 21,000
Book Value on 31.3.2002 = Rs 1,40,000 - Rs 21,000 = Rs 1,19,000

**II. Machinery purchased on 1.11.2002 for Rs 30,000**
Depreciation for 2002-2003 (1.11.2002 to 31.3.2003 = 5 months) = Rs 30,000 \( \times \) 15% \( \times \) (5/12) = Rs 1,875 (approx)

**Calculation of Depreciation @ 15% p.a. (Diminishing Balance Method)**

**Machinery Account**

In simple words: Dhanuja Shree bought two machines at different times and uses a 15% reducing balance method for depreciation, closing books on March 31st. The calculations show how each machine's value dropped over three years. The machinery account clearly tracks both machines, showing their initial purchase and the decreasing value each year due to depreciation. This method ensures that the depreciation expense decreases over the asset's life.

🎯 Exam Tip: When using the diminishing balance method for multiple assets purchased at different times, calculate depreciation for each asset separately, considering its specific purchase date and the remaining book value. Always prorate depreciation for parts of a year.

 

Question 11. On 1st January 2014, Hyagreeva Ltd., purchased a machine costing Rs. 12,000. It is estimated that its working life is four years and it will fetch no scrap value. The company decided to write off depreciation according to the fixed instalment method. Prepare the machinery account.
Answer: To find the annual depreciation using the fixed installment method, we subtract the estimated scrap value from the original cost and divide it by the estimated useful life. Since there is no scrap value, the calculation is simple: \[ \text{Amount of depreciation per year} = \frac{\text{Original cost of the asset} - \text{Estimated scrap value}}{\text{Estimated useful life of the asset in years}} \] \[ = \frac{\text{Rs. } 12,000 - \text{Rs. } 0}{4 \text{ years}} \] \[ = \text{Rs. } 3,000 \] This means Rs. 3,000 will be charged as depreciation each year. The Machinery Account records all transactions related to the machine, including its purchase and yearly depreciation.

In simple words: The fixed installment method charges the same amount of depreciation every year. You record the machine's purchase, then subtract the fixed depreciation amount each year until its book value becomes zero.

🎯 Exam Tip: Remember to always calculate the total cost of an asset (purchase price + installation/freight) before applying the depreciation rate, especially when using the straight-line method.

 

Question 12. Bharathi Ltd., purchased certain machinery at a cost of Rs. 40,000 on 1st January 2014. They decided to write off depreciation @ 20% p.a, according to straight line method. Prepare Machinery Account and Depreciation Account for the year 2014 to 2017.
Answer: Since the straight-line method is used, the annual depreciation amount will remain constant. Depreciation is calculated as 20% of the original cost of Rs. 40,000. Annual Depreciation = \( 20\% \text{ of Rs. } 40,000 = \text{Rs. } 8,000 \). This amount is charged every year. This method makes it easy to predict the asset's value over time.

In simple words: The straight-line method means the same amount is written off as depreciation each year. Both the Machinery Account and Depreciation Account reflect this steady charge over the asset's life.

🎯 Exam Tip: Always close the Depreciation Account by transferring the balance to the Profit & Loss Account at the end of each financial year, and bring down the closing balance of the Machinery Account to the next year.

 

Question 13. Shreyan & Co., purchased a computer for Rs. 47,000 on 1st October 2012 and installed it by spending Rs. 3,000. Every year depreciations is to be charged at 10% on its cost. The computer is sold on IstJuly 2015 at a price of Rs. 35,000. Assuming that the accounts are closed every year on December 31, prepare the computer account.
Answer: First, calculate the total cost of the computer: Purchase price Rs. 47,000 + Installation charges Rs. 3,000 = Rs. 50,000. The installation cost is added because it makes the asset ready for use. Depreciation is charged at 10% on this total cost each year using the fixed installment method. **Depreciation Calculation:** - For 2012 (Oct 1 to Dec 31 = 3 months): \( \text{Rs. } 50,000 \times 10\% \times \frac{3}{12} = \text{Rs. } 1,250 \) - For 2013 (Full year): \( \text{Rs. } 50,000 \times 10\% = \text{Rs. } 5,000 \) - For 2014 (Full year): \( \text{Rs. } 50,000 \times 10\% = \text{Rs. } 5,000 \) - For 2015 (Jan 1 to July 1 = 6 months): \( \text{Rs. } 50,000 \times 10\% \times \frac{6}{12} = \text{Rs. } 2,500 \) **Book Value at Sale:** Total depreciation until July 1, 2015 = \( \text{Rs. } 1,250 + \text{Rs. } 5,000 + \text{Rs. } 5,000 + \text{Rs. } 2,500 = \text{Rs. } 13,750 \) Book value = Original cost - Total depreciation = \( \text{Rs. } 50,000 - \text{Rs. } 13,750 = \text{Rs. } 36,250 \) **Profit/Loss on Sale:** Selling Price = Rs. 35,000 Book Value = Rs. 36,250 Loss on Sale = Book Value - Selling Price = \( \text{Rs. } 36,250 - \text{Rs. } 35,000 = \text{Rs. } 1,250 \)

In simple words: When an asset is bought or sold during the year, depreciation needs to be calculated only for the months it was used. This ensures the correct value is shown at the time of sale, and any profit or loss is recorded accurately.

🎯 Exam Tip: When an asset is sold, remember to calculate depreciation up to the date of sale and determine the book value before comparing it to the selling price to find profit or loss.

 

Question 14. A car was purchased on January 1, 2015 for Rs.80,000 depreciated at 10% on diminishing balance method. It was sold on 31st December 2017 for Rs.50,000. Prepare Car account.
Answer: This question uses the diminishing balance method, where depreciation is calculated on the asset's reduced book value each year, leading to a decreasing depreciation amount over time. **Depreciation Calculation:** - For 2015: \( 10\% \text{ of Rs. } 80,000 = \text{Rs. } 8,000 \). Book Value = \( \text{Rs. } 80,000 - \text{Rs. } 8,000 = \text{Rs. } 72,000 \) - For 2016: \( 10\% \text{ of Rs. } 72,000 = \text{Rs. } 7,200 \). Book Value = \( \text{Rs. } 72,000 - \text{Rs. } 7,200 = \text{Rs. } 64,800 \) - For 2017: \( 10\% \text{ of Rs. } 64,800 = \text{Rs. } 6,480 \). Book Value = \( \text{Rs. } 64,800 - \text{Rs. } 6,480 = \text{Rs. } 58,320 \) **Profit/Loss on Sale:** Selling Price = Rs. 50,000 Book Value at 31st December 2017 = Rs. 58,320 Loss on Sale = Book Value - Selling Price = \( \text{Rs. } 58,320 - \text{Rs. } 50,000 = \text{Rs. } 8,320 \)

In simple words: The diminishing balance method charges a larger depreciation amount in the early years and less in later years. When selling an asset, you compare its remaining value (book value) after all depreciation to the selling price to find if there was a profit or a loss.

🎯 Exam Tip: When using the diminishing balance method, remember that the depreciation rate is applied to the *reduced* book value of the asset, not its original cost, for each subsequent year.

 

Question 15. In a business there was a machine for Rs. 90,000 on 1st January 2014. On 30.06.2014, another machinery was purchased for Rs. 10,000. On 31.12.2014 part of the machine was sold for 3,300, which had a cost price of Rs. 4,000 on 01.01.2014. Prepare machinery account after providing depreciation at 10% p.a on fixed installment basis.
Answer: This problem involves multiple transactions for machinery in one year, including a partial sale, which requires careful calculation of depreciation for each part. The fixed installment (straight-line) method means depreciation is always based on the original cost. **Calculation of Depreciation:** 1. **Original Machine (M1) (Cost Rs. 90,000):** * Depreciation on the part sold (Cost Rs. 4,000) for the whole year 2014 (since it was sold on Dec 31, 2014): \( \text{Rs. } 4,000 \times 10\% = \text{Rs. } 400 \) * Book value of part sold on Dec 31, 2014 = \( \text{Rs. } 4,000 - \text{Rs. } 400 = \text{Rs. } 3,600 \) * Loss on sale of part sold = Book value - Selling price = \( \text{Rs. } 3,600 - \text{Rs. } 3,300 = \text{Rs. } 300 \) * Depreciation on the remaining part of M1 (Cost Rs. 90,000 - Rs. 4,000 = Rs. 86,000) for the full year 2014: \( \text{Rs. } 86,000 \times 10\% = \text{Rs. } 8,600 \) 2. **Second Machine (M2) (Cost Rs. 10,000):** * Purchased on June 30, 2014, so depreciation is for 6 months: \( \text{Rs. } 10,000 \times 10\% \times \frac{6}{12} = \text{Rs. } 500 \) **Total Depreciation for 2014:** \( \text{Rs. } 400 + \text{Rs. } 8,600 + \text{Rs. } 500 = \text{Rs. } 9,500 \) The machinery account will reflect these purchases, sales, and depreciation charges.

In simple words: When you buy new machines or sell parts of old ones, you must keep track of depreciation for each item separately, especially when they are used for different lengths of time in a year. This makes sure your accounts are accurate.

🎯 Exam Tip: For complex scenarios with multiple purchases and sales, break down the depreciation calculation for each asset or part of an asset, accounting for partial years, to avoid errors.