Depreciation

Depreciation may be defined as the permanent and continuous diminution in the quality, quantity or value of asset. Causes of Depreciation Physical wear and tear due to constant use. With the passage of time. When the assets are exposed to the forces on nature like weather, winds, rains etc. the value of each asset may decrease even they are not put to any use. Efflux of time. Some assets have a fixed period of legal life such as lease, patents etc. on the expiry of the life the assets will cease to exist. Obsolescence. An old machinery, through in good condition may become obsolete due to introduction of a new machinery which produces more the old machinery.

Need For Charging Depreciation

To ascertain true results of operations To present true and fair view of financial position To ascertain the true cost of production To comply with legal requirements To accumulate funds for replacement of assets To compute tax liability

Methods of Depreciation
1. Original Cost Method or Fixed Instalment Method or Straight Line Method. 2. Diminishing Balance Method or Written Down Value Method or Reducing Instalment Method. 3. Annuity Method. 4. Depreciation Fund or Sinking Fund Method. 5. Sum of the Digits Method. 6. Machine Hour Rate Method. 7. Depletion Method.

Problems
1. A firm purchased Plant &Machinery on 1st April, 2006 for Rs. 1,00,000. depreciation is write off at the rate of 10 per cent per annum under straight line method. The firm closes its books on 31st December every year. Show the Machinery Account for 3 years.

Problems
2. Tick Tick Company purchased second-hand machinery on 1st January 2004 for Rs. 25,000 and immediately spent Rs. 5,000 on overhauling. On July 1st 2004 additional plant costing Rs. 20,000 was purchased. On July 1 2006 the machinery acquired on 1st January 2004 having become obsolete was sold off for Rs. 8,000. on the same date another machinery was purchased at a cost of Rs. 40,000. Depreciation is provided annually on 31st December at the rate of 10% per annum on the original cost of the machine. Show the machinery Account for 4 years.

Problems
3. 0n 1st July ,2005 A company purchased a second hand machinery for Rs. 42,000 and spent Rs. 3,000 on reconditioning and installing it. On 1st January 2006 the firm purchased another machinery for Rs. 25,000. on 30th June, 2007 the machinery purchased on 1st January 2006 was sold for Rs. 15,000 and on 1st July 2007 a fresh plant was installed at a cost of Rs. 30,000. The company writes off 10% depreciation on the original cost. The accounts are closed every year on 31st March. Show the machinery account for the year ending 31st March, 2008.

Problems
4.A company whose accounting year is calendar year, purchased on 1st April 2005 machinery costing Rs. 30,000. it purchased further machinery on 1st October 2005 costing Rs. 20,000. On 1st July 2007 one-third of the machinery installed on 1st April 2005 become obsolete and was sold for Rs. 3,000. Depreciation is being written off on fixed instalment system at 10% per annum. Prepare the machinery account as would appear I n the ledger of the company for 4 years.

Problems WDV Method

5. A company purchased machinery on 1st July 2006 for Rs. 60,000.Depreciation is written off at the rate of 10% under Reducing Instalment Method. Show the Machinery Account for 3 years assuming that the books are closed on 31st December every year.

Problems
6. A firm purchased on 1st January 2005 certain Machinery for Rs. 60,000.On 1st July 2005, additional machinery costing Rs. 40,000 was acquired. On 1st October 2007 the machinery acquired on 1st January 2005 was sold for Rs. 35,000 and on the same day new machinery was purchased costing Rs. 45,000. assuming the 10% depreciation is charged under diminishing balance method, show the machinery account upto 31st December 2009.

Problems
7. A company bought a second-hand machine on 1- 1 -2003 for Rs. 37,000 and immediately spent Rs. 2,000 on its repairs and Rs. 1,000 for its erection. On 1-7-2004, it purchased another machine for Rs. 10,000 and on 1-7-2005 it sold off the first machine for Rs. 28,000 and bought an another machine for Rs. 25,000. on 1-7-2006 the second machine was also sold off for Rs. 2,000. Depreciation was provided on Machinery @ 10% p.a. on the original cost annually on 31st December. In 2004 however the company changed the method of providing depreciation and adopted the written down value method with a rate of depreciation at 15% p.a. Prepare the Machinery account for four years commencing from the acquisition of the first machine.

Problems
8. A Ltd purchased on 1-1-2001 a second hand plant for Rs. 30,000 and immediately spent Rs. 20,000 on overhauling it. On 1-7- 2001 additional machinery costing Rs. 25,000 was purchased. On 1-7-2003, the plant purchased on 1-1-2001 become obsolete and was sold for Rs. 10,000. on that date new machinery was purchased at a cost of Rs. 60,000. Depreciation was provided for annually on 31st December, @10% p.a. on original cost of assets. In 2004, however, the company changed this method of providing depreciation and adopted the method of writing off 15 % on diminishing value. Show the Machinery Account as it would appear in the books of the company for 2001 to 2005 both inclusive.