CLASS 11 COMMERCE ACCOUNTANCY (PART – I) CHAPTER – 7 DEPRECIATION, PROVISIONS AND RESERVES

Depreciation, Provisions And Reserves

Page No 270:

Question 1:

What is Depreciation?

ANSWER:

Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time, thus, due to their regular use, there occurs continuous wear and tear and consequently fall in their value. This fall in the value of fixed assets, due to their regular use or expiry of time is termed as depreciation.

A machinery costing Rs 1,00,000 and its useful life is 10 years; so, depreciation is calculated as:

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Question 2:

State briefly the need for providing depreciation.

ANSWER:

The needs for providing depreciation are given below.

  1. To ascertain true net profit or net loss− Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to Profit and Loss Account. Assets are used for earning revenues and its cost is charged in form of depreciation from Profit and Loss Account.
  2. To show true and fair view of financial statements− If depreciation is not charged, assets are shown at higher value than their actual value in the Balance Sheet; consequently, the Balance Sheet  does not reflect true and fair view of financial statements.
  3. For ascertaining the accurate cost of production− Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low sale price and thus leads to low profit.
  4. Distribution of dividend out of profit− If depreciation is not charged, which leads to overestimating of profit and consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.
  5. To provide funds for replacement of assets− Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life.
  6. Consideration of tax− If depreciation is charged, then Profit and Loss Account will disclose lesser profit as to when the depreciation is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount.

Question 3:

What are the causes of depreciation?

ANSWER:

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  1. Constant use− Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.
  2. Expiry of time− With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.
  3. Obsolescence− Due to the fast technological innovations and inventions today’s assets may be outdated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets.
  4. Expiry of legal rights− If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life. For example, if a land is acquired for Rs 1,00,000 for 25 years on lease, then each year its value depreciates by Gr11 Acc NCERT TQ Chap7 DP Ami mal html 6d3385cfof its gross value. At the end of the 25th year, the value of the lease will be zero.
  5. Accident− An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity. The loss due to accident is permanent in nature.
  6. Permanent fall in value− Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall in market price is permanent, it is accounted, which leads to a fall in the value of fixed assets in the books.

Question 4:

Explain basic factors affecting the amount of depreciation.

ANSWER:

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  1. Total cost of asset− The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing asset and bringing the asset to its usable condition are included in the total cost of asset.
  2. Estimated useful life− Every asset has its useful life other than its physical life (in terms of number of years, units, etc.), used by a business. The useful life of an asset is considered to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if business acquiress a piece of land on lease for 25 years, then the useful life of the piece of land is considered to be 25 years.
  3. Estimated scrap value− It is estimated as the net realisable value or sale value of an asset at the end of its effective life. It is deducted from the total cost of an asset. For example, furniture is acquired at Rs 50,000 and its effective life is 10 years.

After 10 years, the furniture will be sold at Rs 10,000. So, depreciation is charged as:

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Question 5:

Distinguish between straight line method and written down value method of calculating depreciation.

ANSWER:

Basis of DifferenceStraight Line MethodWritten Down Value Method
Basis for calculationDepreciation is calculated on the original cost of an asset.Depreciation is calculated on the reducing balance, i.e., the book value of an asset.
Amount of depreciationEqual amount is charged each year over the effective life of the asset.Diminishing amount of depreciation (on the written down value of asset) is charged each year over the effective life of the asset.
Book value of assetBook value of the asset becomes zero at the end of its effective life.Book value of the asset can never be zero.
SuitabilityIt is suitable for the assets like patents, copyright, land and buildings, etc., which have lesser possibility of obsolescence and lesser repair charges.It is suitable for assets that needs more repair in the later years like, plant and machinery, car, etc.
Effect of depreciation and repair on profit and loss accountUnequal effect over the life of the asset, as depreciation remains same over the years but repair cost increases in the later years.Equal effect over the life of the asset, as depreciation cost is high and repairs are less in the initial years but in the latter years the repair costs increase and depreciation cost decreases.
Recognition under Income Tax ActIt is not recognised under the income tax act.It is recognised under the income tax act.

Question 6:

In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.

ANSWER:

If the management does not want to exert undue burden on the profits due to high depreciation and repair costs in the latter years of the assets, then ‘written down method’ should be a preferred method to provide depreciation. This is because the cost of depreciation reduces; whereas, repair and maintenance expenses increase in the latter years. However, on the whole, it does not exert increasing burden on profits.

Question 7:

What are the effects of depreciation on profit and loss account and balance sheet?

ANSWER:

The effects of depreciation on Profit and Loss Account are given below.

  1. Depreciation increases the debit side of profit and loss account and hence reduces net profit.
  2. Depreciation increases the total expenses, leading to an excess of debit over credit balance.

The effects of depreciation on Balance Sheet are given below.

  1. It reduces the original cost or book value of the concerned asset.
  2. It reduces the overall balance of asset’s column in the balance sheet.

Question 8:

Distinguish between provision and reserve.

ANSWER:

Basis of DifferenceProvisionReserve
MeaningIt is created to meet the known liability.It is created to meet unknown liability.
NatureProvision is charged against profit.Reserve is appropriation of the profit.
PurposeIt is created for a specific liability.It is created for strengthening the financial position.
Mode of creationIt is created by debiting the profit and loss account.It is created by debiting the profit and loss appropriation account.
Use for payment of dividendIt cannot be used for payment of dividends.It can be used for payment of dividends.
CreationCreation of provision is compulsory. It is created even if there is no profit.Creation of reserve depends on the discretion of the management. It is created only when there is profit.

Question 9:

Give four examples each of provision and reserves.

ANSWER:

Four examples of provision are given below.

  1. Provision for bad and doubtful debts
  2. Provision for discount on debtors
  3. Provision for depreciation
  4. Provision for taxation

Four examples of reserve are given below.

  1. General reserve
  2. Capital reserve
  3. Dividend equalisation reserve
  4. Debenture redemption reserve

Question 10:

Distinguish between revenue reserve and capital reserve.

ANSWER:

Basis of DifferenceRevenue ReserveCapital Reserve
SourceIt is created out of revenue profit, i.e., revenue earned from normal activities of business operations.It is created out of capital profit, i.e., gain from other than normal activities of business operations, such as sale of fixed assets, etc.
DividendIt can be used for dividend.It cannot be used for dividend.
PurposeIt is created for strengthening the financial position of the business.It is created for the purpose laid down in the Companies Act.

Question 11:

Give four examples each of revenue reserve and capital reserves.

ANSWER:

  1. Four examples of revenue reserve are given below.
  1. General Reserve
  2. Retained Earnings
  3. Dividend Equalisation Reserve
  4. Debenture Redemption Reserve
  5. Four examples of capital reserve are given below.
  1. Issues of shares at premium
  2. Profit or issue of shares
  3. Sale of fixed assets
  4. Profit on redemption of debentures

Question 12:

Distinguish between general reserve and specific reserve.

ANSWER:

Basis of DifferenceGeneral ReserveSpecific Reserve
MeaningWhen the reserve is created without any specified purpose, the reserve is called general reserve.When reserve is created for some specific purpose, the reserve is called specific reserve.
UsageIt can be used for any purpose.It cannot be used for any purpose other than the specified purpose for which it is created.
ExamplesRetained earnings, reserve funds, etc.Debenture redemption reserve, dividend equalisation reserve, etc.

Question 13:

Explain the concept of secret reserve.

ANSWER:

Reserves that are created by overstating liabilities or understating assets are known as secret reserves. They are not shown in the balance sheet. These reduce tax liabilities, as the liabilities are overstated. It is created by management to avoid competition by reducing profit. Creation of secret reserve is not allowed by Companies Act, 1956 that requires full disclosure of all material facts and accounting policies while preparing final statements.

Question 1:

Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

ANSWER:

Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time (due to their regular use), there exists continuous wear and tear and consequently fall in their value. This fall in the value of fixed assets (due to regular use or expiry of time) is termed as depreciation.

A machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation will be calculated as:

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  1. To ascertain true net profit or net loss− Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to profit and loss account. Assets are used for earning revenues and its cost is charged in form of depreciation from profit and loss account.
  2. To show true and fair view of financial statements− If depreciation is not charged, assets are shown at higher value than their actual value in the balance sheet; consequently, the balance sheet does not reflect true and fair view of financial statements.
  3. For ascertaining the accurate cost of production− Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low sale price and thus leads to low profit.
  4. Distribution of dividend out of profit− If depreciation is not charged, which leads to overestimating of profit and consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.
  5. To provide funds for replacement of assets− Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life.
  6. Consideration of tax− If depreciation is charged, then profit and loss account will disclose lesser profit as to when the depreciation is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount.

Below are given the causes for depreciation.

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  1. Constant use− Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.
  2. Expiry of time− With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.
  3. Obsolescence− Due to the fast technological innovations and inventions today’s assets may be outdated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets.
  4. Expiry of legal rights− If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life. For example, if a land is acquired for Rs 1,00,000 for 25 years on lease, then each year its value depreciates by Gr11 Acc NCERT TQ Chap7 DP Ami mal html 6d3385cfof its gross value. At the end of the 25th year, the value of the lease will be zero.
  5. Accident− An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity. The loss due to accident is permanent in nature.
  6. Permanent fall in value− Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall in market price is permanent, it is accounted, which leads to a fall in the value of fixed assets in the books.

Question 2:

Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.

ANSWER:

Straight Line method

It is a simple method of charging depreciation. Under this method, depreciation is charged on the original cost of an asset, at a fixed rate of percentage. In this method, amount of depreciation remains same from year to year and asset’s value becomes zero at the end of its useful life.

Amount of depreciation is calculated as under:

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Advantages of Straight Line Method

  1. It is simple to calculate.
  2. Asset can be completely written off, i.e., asset can be depreciated until the net scrap value is zero.
  3. Same amount of depreciation is charged every year. Therefore, it helps in easy comparison of Profit and Loss Account for different years.
  4. It is used for assets that have low repairs and maintenance expenses and are continuously used over a period of time.

Limitations of Straight Line Method

  1. Burden of deprecation is more on profit and loss account in the later years, when repair and maintenance costs increase, as asset becomes older.
  2. Value of asset becomes zero in the books even if asset is still in usable condition in business.

Uses of Straight Line Method

  1. This method is useful where repairs and maintenance expenses on asset are low.
  2. It is also useful when an asset is continuously used from one year to another.
  3. It is useful when the value of assets, such as patent, copyright, goodwill, etc., becomes zero

Written Down Value Method

This method is applicable where depreciation is charged on the diminishing balance, i.e., book value of the asset. In this method, asset’s value goes on diminishing year after year and the amount of depreciation declines.

Rate of depreciation is calculated as follows:

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Where,

R represents rate of depreciation

n represents expected useful life of the asset

s represents the scrap value

c represents the cost of the asset

Advantages of Written Down Value Method

  1. It is based on the logical assumption that asset is used more in the earlier years, so more cost is charged in form of depreciation.
  2. It is suitable for the assets where repairs are more in the later years, as depreciation is lesser and on a whole the combined burden of depreciation and repairs exerts equal pressure on the net profit over years.
  3. This method is accepted by the income tax authorities.
  4. As more depreciation is charged in the earlier years, so the loss due to obsolescence of the asset is reduced.

Limitations of Written Down Value Method

  1. It is difficult to calculate and is a time consuming process.
  2. The value of an asset cannot be zero, thus the asset cannot be completely written off.
  3. There arises shortage of funds for replacement of new asset. This happens due to the fact that the amount of depreciation is retained and used in the business. Consequently, at the end of the useful life of an old asset, business finds it difficult to arrange funds for its replacement.

Uses of Written Down Value Method

  1. It is useful when assets have long life.
  2. It is useful for those assets that require more repair and maintenance costs in the later years.
  3. It provides easy calculation to provide depreciation of additional asset purchased during a year.

Difference between Straight Line Method and Written Down Value Method

Basis of DifferenceStraight Line MethodWritten Down Method
Basis for calculationDepreciation is calculated on the original cost of an asset.Depreciation is calculated on the reducing balance, i.e., the book value of an asset.
Amount of depreciationEqual amount is charged each year over the effective life of the asset.Diminishing amount of depreciation (on the written down value of asset) is charged each year over the effective life of the asset.
Book value of assetBook value of the asset becomes zero at the end of its effective life.Book value of the asset can never be zero.
SuitabilityIt is suitable for the assets like, patents, copyrights, land and buildings, etc., which have lesser possibility of obsolescence and lesser repair charges.It is suitable for assets that needs more repairs and maintenance costs in the later years like, plant and machinery, car, etc.
Effect of depreciation and repair on profit and loss accountUnequal effect over the life of the asset, as depreciation remains same over the years but repair cost increases in the later years.Equal effect over the life of the asset, as depreciation is high and repairs are less in the initial years but in the latter years the repair cost increases and depreciation cost decreases.
Recognition under Income Tax ActIt is not recognised under the Income Tax Act.It is recognised under the Income Tax Act.

Question 3:

Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

ANSWER:

The two methods of recording depreciation are diagrammatically presented below.

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  1. Charging depreciation to Asset Account− Under this method, depreciation is directly credited to the asset account and no separate account is prepared for provision of depreciation. Under this method, the original cost of an asset and the total amount of depreciation cannot be determined from the Balance Sheet, as the Asset Account appears at its written down value.

Journal entries for depreciation are given below.

When depreciation is charged to Assets Account

Depreciation A/cDr.
 To Assets A/c 
(Depreciation charged to Assets Account) 

Closing of Depreciation Account

Profit and Loss A/cDr.
 To Depreciation A/c 
(Depreciation transferred to Profit and Loss Account) 
  1. Creating Provision for Depreciation Account− Under this method, depreciation is not credited to the Assets Account; in fact, it is credited to the provision for Depreciation Account. At the year end, asset is shown at the original cost in the Balance Sheet and total depreciation up to the date of Balance Sheet is shown as Provision for Depreciation Account.

Journal entries for depreciation are:

Charging Depreciation

Depreciation A/cDr.
 To Provision for Depreciation A/c 
(Depreciation charged) 

Closing of Depreciation Account

Profit and Loss A/cDr.
 To Depreciation A/c 
(Depreciation account is transferred to Profit and Loss Account) 

When the asset is sold, the accumulated depreciation on that asset is credited to the Asset Account by passing the following Journal entry:

Provision for Depreciation A/cDr.
 To Asset A/c 
(Accumulated depreciation transferred to Assets Account) 

Question 4:

Explain determinants of the amount of depreciation.

ANSWER:

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  1. Total cost of asset− The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing of assets and bringing the assets to their usable condition are included in the total cost of asset.
  2. Estimated useful life− Every asset having it’s useful life other than it’s physical life, in terms of number of years, units, etc. are considered to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if business acquires a piece of land on lease for 25 years, it’s useful life is considered to be 25 years.
  3. Estimated scrap value− It is estimated as the net realisable value or sale value of an asset at the end of it’s effective life. It is deducted from the total cost of an asset. For example, furniture is acquired at Rs 50,000 with it’s effective life of 10 years.

After 10 years, furniture will be sold at Rs 10,000. So, depreciation is charged as:

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Question 5:

Name and explain different types of reserves in details.

ANSWER:

Reserves− Reserves are created for strengthening the financial positions and future growth. It is created out of profit earned by business.

The broad classification of reserve is diagrammatically presented below.

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  1. Revenue Reserve− It is created out of revenue profit, i.e., revenue earned from normal activities of the business. It can be used for either general purpose or specific purpose. It is of two types:

a. General Reserve− When the reserve is created without any specified purpose, then the reserve is called general reserve. It is a free reserve and so can be used for any purpose. It can also be used for future growth and expansion. For example, reserve funds, retained earnings, contingencies reserves, etc.

b. Specific Reserve− When reserve is created for some specific purpose, then the reserve is called specific reserve.

Examples of specific reserve are given below.

i. Debenture Redemption Reserve

ii. Investment Fluctuation Reserve

iii. Dividend Equalisation Reserve

iv. Workmen Compensation Fund

  1. Capital Reserve− It is created out of capital profit, i.e., gain from other than normal activities of business operations, such as sale of fixed asset, etc. It is created to meet the capital loss. It cannot be distributed as dividend. The example of capital reserves are given below.

i. Premium on issue of shares

ii. Premium on issue of debentures

iii. Profit on redemption of debentures

iv. Profit on sale of fixed assets

v. Profit on reissue of forfeited shares

vi. Profit prior to incorporation

  1. Secret Reserves− Reserves that are created by overstating liabilities or understating assets are known as secret reserves. They are not shown in the Balance Sheet. These reduce tax liabilities, as the liabilities are overstated. It is created by management to avoid competition by reducing profit. Creation of secret reserve is not allowed by Companies Act, 1956, which requires full disclosure of all materials facts and accounting policies, while preparing final statements.

Page No 271:

Question 6:

What are provisions? How are they created? Give accounting treatment in case of provision for doubtful Debts.

ANSWER:

Provisions are the amount that is created against profit to meet the known liability; however, the amount of liability is uncertain. It is created for specific liability. Creation of provision is compulsory even if, there is no profit. The underlying principle behind creation of provision is conservatismviz., to prepare for future loss. The main rationale for making provisions is to provide cushion to the future business performance against the uncertain and unforeseen losses that may arise from the past transactions. A few examples of provisions are given below.

  1. Provision for bad and doubtful debts
  2. Provision for depreciation
  3. Provision for taxation
  4. Provision for discount on debtors

Provisions are made by debiting the Profit and Loss Account on estimate basis. The provisions are created on the basis of past experiences. Every year, a business may experience common losses, such as depreciation of fixed assets, taxation, etc., which are although known; however, their exact amount of future period is unknown. Thus, business creates provision of certain percentage every year, which is truly based on the intuitions and past experiences. These unascertained liabilities in form of provisions are kept aside, which help future business activities, undisturbed from the future losses.

Accounting treatment for provision for doubtful debts is:

Profit and Loss A/cDr.
 To Provision for Doubtful Debts 
(Provision for doubtful debt made) 

Question 1:

On April 01, 2010, Bajrang Marbles purchased a Machine for Rs 1,80,000 and spent Rs 10,000 on its carriage and Rs 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be Rs 20,000.

(a)Prepare Machine account and Depreciation account for the first four years by providing depreciation on straight line method. Accounts are closed on March 31st every year.
(b)Prepare Machine account, Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year.

ANSWER:

(a)

Books of Bajrang Marbles 
Machinery Account
Dr.      Cr.
DateParticularsJ.F.Amount(₹)DateParticularsJ.F.Amount(₹)
2010   2011   
Apr.01Bank 2,00,000Mar.31Depreciation 18,000
 (1,80,0000 + 20,000)   Balance c/d 1,82,000
   2,00,000   2,00,000
        
2011   2012   
Apr.01Balance b/d 1,82,000Mar.31Depreciation 18,000
    Mar.31Balance c/d 1,64,000
   1,82,000   1,82,000
        
2012   2013   
Apr.01Balance b/d 1,64,000Mar.31Depreciation 18,000
    Mar.31Balance c/d 1,46,000
   1,64,000   1,64,000
        
2013   2014   
Apr.01Balance b/d 1,46,000Mar.31Depreciation 18,000
    Mar.31Balance c/d 1,28,000
   1,46,000   1,46,000
        
         

Working notes: Calculation of annual depreciation

Depreciation (p.a.)=(Original cost – Scrap Value )  
Estimated Life of Asset (years)  
 =(1,80,000 + 10,000 + 10,000 – 20,000) 
10
 =₹ 18,000 per annum 
Depreciation Account
Dr.      Cr.
DateParticularsJ.F.Amount(₹)DateParticularsJ.F.Amount(₹)
2011   2011   
Mar.31Machinery 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        
2012   2012   
Mar.31Machinery 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        
2013   2013   
Mar.31Machinery 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        
2014   2014   
Mar.31Machinery 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        

(b)

Machinery Account
Dr.      Cr.
DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount(₹)
2010   2011   
Apr.01Bank 2,00,000Mar.31Balance c/d 2,00,000
        
   2,00,000   2,00,000
        
2011   2012   
Apr.01Balance b/d 2,00,000Mar.31Balance c/d 2,00,000
        
   2,00,000   2,00,000
        
2012   2013   
Apr.01Balance b/d 2,00,000Mar.31Balance c/d 2,00,000
        
   2,00,000   2,00,000
        
2013   2014   
Apr.01Balance b/d 2,00,000Mar.31Balance c/d 2,00,000
        
   2,00,000   2,00,000
        
 Provision for Depreciation Account 
Dr.      Cr. 
DateParticularsJ.F.Amount(₹)DateParticularsJ.F.Amount(₹)
2011   2011   
Mar.31Balance c/d 18,000Mar.31Depreciation 18,000
        
   18,000   18,000
        
    2011   
    Apr.01Balance b/d 18,000
 2012   2012   
 Mar.31Balance c/d  36,000Mar.31Depreciation 18,000
   36,000   36,000
        
    2012   
    Apr.01Balance b/d 36,000
 2013   2013   
 Mar.31Balance c/d   54,000Mar.31Depreciation 18,000
   54,000   54,000
        
    2003   
    Apr.01Balance b/d 54,000
 2014   2014   
 Mar.31Balance c/d  72,000Mar.31Depreciation 18,000
   72,000   72,000
        
Depreciation Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2011   2011   
Mar.31Provision for Depreciation 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        
2012   2012   
Mar.31Provision for Depreciation 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        
2013   2013   
Mar.31Provision for Depreciation 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        
2014   2014   
Mar.31Provision for Depreciation 18,000Mar.31Profit and Loss 18,000
        
   18,000   18,000
        

Question 2:

On July 01, 2010, Ashok Ltd. Purchased a Machine for Rs 1,08,000 and spent Rs 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be Rs 12,000.

Prepare machine account and depreciation Account in the books of Ashok Ltd. For first three years, if depreciation is written off according to straight line method. The account are closed on December 31st, every year.

ANSWER:

Books of Ashok Ltd.
Machinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2010   2010   
Jul.01Bank 1,20,000Dec.31Depreciation 4,500
    Dec.31Balance c/d 1,15,500
   1,20,000   1,20,000
        
2011   2011   
Jan.01Balance b/d 1,15,500Dec.31Depreciation 9,000
    Dec.31Balance c/d 1,06,500
   1,15,000   1,15,500
        
2012   2012   
Jan.01Balance b/d 1,06,500Dec.31Depreciation 9,000
    Dec.31Balance c/d 97,500
   1,06,500   1,06,500
2013        
Jan.01Balance b/d 97,500    
        
Depreciation Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.AmountRs
2010   2010   
Dec.31Machinery 4,500Dec.31Profit and Loss 4,500
        
   4,500   4,500
        
2011   2011   
Dec.31Machinery 9,000Dec.31Profit and Loss 9,000
        
   9,000   9,000
        
2012   2012   
Dec.31Machinery 9,000Dec.31Profit and Loss 9,000
        
   9,000   9,000
        

Working Note:

Calculation of annual depreciation

Depreciation (p.a.)=(1,08,000 + 12,000 – 12,000)
12 years
 =Rs 9,000 per annum

Question 3:

Reliance Ltd. Purchased a second hand machine for Rs 56,000 on October 01, 2011 and spent Rs 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for Rs 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of Rs 1,000 is expected to be incurred to recover the salvage value of Rs 6,000. Prepare machine account and Provision for depreciation account for the first three years charging depreciation by fixed Instalment Method. Accounts are closed on March 31, every year.

ANSWER:

Books of Reliance Ltd.
Machinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2011   2011   
Oct.01Bank 84,000    
    Dec.31Balance c/d 84,000
   84,000   84,000
        
2012   2012   
Jan.01Balance b/d 84,000    
    Dec.31Balance c/d 84,000
   84,000   84,000
        
2013   2013   
Jan.01Balance b/d 84,000    
    Dec.31Balance c/d 84,000
   84,000   84,000
        
Provision for Depreciation  Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
    2011   
    Dec.31Depreciation 1,316
2011       
Dec.31Balance c/d 1,316    
   1,316   1,316
        
    2012   
    Jan.01Balance b/d 1,316
2012   Dec.31Depreciation 5,267
Dec.31Balance c/d 6,583    
   6,583   6,583
        
    2013   
    Jan.01Balance b/d 6,583
2013   Dec.31Depreciation 5,267
Dec.31Balance c/d 11,850    
   11,850   11,850
    2014   
    Jan.01Balance b/d 11,850
        

Working Note:

Calculation of annual depreciation

Depreciation (p.a.)=(56,000 + 28,000 – 6,000 + 1,000)
15 years
 =Rs 5,267 per annum

Note: As per the solution, the balance of provision for depreciation account, as on March.31, 2015 is Rs 11,850; whereas, as per the book, it is Rs 18,200.

However, if we ignore the scrap value and prepare provision for depreciation for 4 years, the answer would match to that of the book.

Question 4:

Berlia Ltd. Purchased a second hand machine for Rs 56,000 on July 01, 2015 and spent Rs 24,000 on its repair and installation and Rs 5,000 for its carriage. On September 01, 2016, it purchased another machine for Rs 2,50,000 and spent Rs 10,000 on its installation.

(a) Depreciation is provided on machinery @10% p.a on original cost method annually on December 31. Prepare machinery account and depreciation account from the year 2015 to 2018.

(b) Prepare machinery account and depreciation account from the year 2015 to 20018, if depreciation is provided on machinery @10% p.a. on written down value method annually on December 31.

ANSWER:

Books of Berlia Ltd.(a)
Machinery Account (Original Cost Method)
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2015   2015   
Jul.01Bank (i) 85,000Dec.31Depreciation 4,250
 (5,600 + 24,000 + 5,000)  Dec.31Balance c/d 80,750
   85,000   85,000
        
2016   2016   
Jan.01Balance b/d (i) 80,750Dec.31Depreciation  
Sep.01Bank (ii) 2,60,000 (i) 8,500, (ii) 8,667 17,167
 (2,50,000 + 10,000)  Dec.31Balance c/d 3,23,583
     (i) 72,250, (ii) 2,51,333  
   3,40,750   3,40,750
        
2017   2017   
Jan.01Balance b/d 3,23,583Dec.31Depreciation  
 (i) 72,250, (ii) 2,51,333   (i) 8,500, (ii) 26,000 34,500
    Dec.31Balance c/d  
     (i) 63,750, (ii) 2,25,333 2,89,083
   3,23,583   3,23,583
        
2018Balance b/d  2018   
Jan.01(i) 63,750, (ii) 2,25,333 2,89,083Dec.31Depreciation  
     (i) 8,500, (ii) 26,000 34,500
    Dec.31Balance c/d  
     (i) 55,250, (ii) 1,99,333 2,54,583
   2,89,083   2,89,083
        
Depreciation Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2015   2015   
Dec.31Machinery 4,250Dec.31Profit and Loss 4,250
   4,250   4,250
        
2016   2016   
Dec.31Machinery  Dec.31Profit and Loss 17,167
 (i) 8,500 (ii) 8,667 17,167    
   17,167   17,167
        
2017   2017   
Dec.31Machinery  Dec.31Profit and Loss 34,500
 (i) 8,500 (ii) 26,000 34,500    
   34,500   34,500
        
2018   2018   
Dec.31Machinery 34,500Dec.31Profit and Loss 34,500
 (i) 8,500 (ii) 26,000 34,500   34,500
        

Working notes: Calculation of annual depreciation

(i) Depreciation (p.a.) on Machinery Purchased on July 01, 2015

 = (56,000 + 24,000 + 5,000) ×10
100
 = Rs 8,500 per annum 

(ii) Depreciation (p.a.) on Machinery purchased on September 01, 2016.

 = (2,50,000 + 10,000)  ×10
100
 = Rs 26,000 per annum 

(b)

Machinery Account (Written Down Value method)
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2015   2015   
Jul.01Bank (i) 85,000Dec.31Depreciation 4,250
 (5,600 + 24,000 + 5,000)  Dec.31Balance c/d 80,750
   85,000   85,000
        
2016   2016   
Jan.01Balance b/d (i) 80,750Dec.31Depreciation  
Sep.01Bank (ii) 2,60,000 (i) 8,075, (ii) 8,667 16,742
 (2,50,000 + 10,000)  Dec.31Balance c/d  
     (i) 72,675, (ii) 2,51,333  3,24,008
   3,40,750   3,40,750
        
2017   2017   
Jan.01Balance b/d 3,24,008Dec.31Depreciation  
 (i) 72,675, (ii) 2,51,333   (i) 7,268, (ii) 25,133 32,401
    Dec.31Balance c/d  
     (i) 65,407, (ii) 2,26,200 2,91,607
   3,24,008   3,24,008
        
2018Balance b/d  2018   
Jan.01(i) 65,407, (ii) 2,26,200 2,91,607Dec.31Depreciation  
     (i) 6,540, (ii) 22,620 29,160
    Dec.31Balance c/d  
     (i) 58,867, (ii) 2,03,580 2,62,447
   2,91,607   2,91,607
        
Depreciation Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.Amount Rs
2015   2015   
Dec.31Machinery 4,250Dec.31Profit and Loss 4,250
   4,250   4,250
        
2016   2016   
Dec.31Machinery  Dec.31Profit and Loss 16,742
 (i) 8,075, (ii) 8,667 16,742    
   16,742   16,742
        
2017   2017   
Dec.31Machinery  Dec.31Profit and Loss 32,401
 (i) 7,268, (ii) 25,133 32,401    
   32,401   32,401
        
2018   2018   
Dec.31Machinery  Dec.31Profit and Loss 29,160
 (i) 6,540, (ii) 22,620 29,160    
   29,160   29,160
        

Page No 272:

Question 5:

Ganga Ltd. purchased a machinery on January 01, 2014 for Rs 5,50,000 and spent Rs 50,000 on its installation. On September 01, 2014 it purchased another machine for Rs 3,70,000. On May 01, 2015 it purchased another machine for Rs 8,40,000 (including installation expenses).

Depreciation was provided on machinery @10% p.a. on original cost method annually on December 31. Prepare:

(a) Machinery account and depreciation account for the years 2014, 2015, 2016 and 2017.

(b) If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2014, 2015, 2016 and 2017.

ANSWER:

(a)

Books of Ganga Ltd.
Machinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2014   2014   
Jan.01Bank (i) 6,00,000Dec.31Depreciation(i) 60,000 (ii) 12,333  72,333
 (5,50,000 + 50,000)  Dec.31Balance c/d  
Sep.01Bank (ii) 3,70,000 (i) 5,40,000, (ii) 3,57,667  8,97,667
   9,70,000   9,70,000
        
2015   2015   
Jan.01Balance b/d  Dec.31Depreciation  
 (i) 5,40,000, (ii) 3,57,667 8,97,667 (i) 60,000, (ii) 37,000,  
May.01Bank (iii) 8,40,000 (iii) 56,000 1,53,000
    Dec.31Balance c/d  
     (i) 4,80,000 (ii) 3,20,667,  
     (iii) 7,84,000 15,84,667
   17,37,667   17,37,667
        
2016   2016   
Jan.01Balance b/d  Dec.31Depreciation  
 (i) 4,80,000, (ii) 3,20,667   (i) 60,000, (ii) 37,000,  
 (iii) 7,84,000 15,84,667Dec.31(iii) 84,000 1,81,000
     Balance c/d  
     (i) 4,20,000, (ii) 2,83,667,  
     (iii) 7,00,000 14,03,667
   15,84,667   15,84,667
        
2017   2017   
Jan.01Balance b/d  Dec.31Depreciation  
 (i) 4,20,000, (ii) 2,83,667,   (i) 60,000, (ii) 37,000,  
 (iii) 7,00,000 14,03,667 (iii) 84,000 1,81,000
    Dec.31Balance c/d  
     (i) 3,60,000, (ii) 2,46,667,  
     (iii) 6,16,000 12,22,667
   14,03,667   14,03,667
        
Depreciation Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2014   2014   
Dec.31Machinery 72,333Dec.31Profit and Loss 72,333
   72,333   72,333
        
2015   2015   
Dec.31Machinery 1,53,000Dec.31Profit and Loss 1,53,000
   1,53,000   1,53,000
        
2016   2016   
Dec.31Machinery 1,81,000Dec.31Profit and Loss 1,81,000
   1,81,000   1,81,000
        
2017   2017   
Dec.31Machinery 1,81,000Dec.31Profit and Loss 1,81,000
   1,81,000   1,81,000
        

(b)

Machinery Account 
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2014   2014   
Jan.01Bank (i) 6,00,000    
 (5,50,000 + 50,000)  Dec.31Balance c/d  
Sep.01Bank (ii) 3,70,000   9,70,000
   9,70,000   9,70,000
        
2015   2015   
Jan.01Balance b/d      
 (i) 6,00,000 (ii) 3,70,000 9,70,000    
May.01Bank (iii) 8,40,000Dec.31Balance c/d 18,10,000
   18,10,000   18,10,000
        
2016   2016   
Jan.01Balance b/d  Dec.31Balance c/d 18,10,000
 (i) 6,00,000 (ii) 3,70,000      
 (iii) 8,40,000 18,10,000    
   18,10,000   18,10,000
        
2017   2017   
Jan.01Balance b/d  Dec.31Balance c/d 18,10,000
 (i) 6,00,000 (ii) 3,70,000      
 (iii) 8,40,000 18,10,000    
   18,10,000   18,10,000
        
Provision for Depreciation  Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2014   2014   
Dec.31Balance c/d 72,333Dec.31Depreciation 72,333
        
   72,333   72,333
        
    2015   
2015   Jan.01Balance b/d 72,333
Dec.31Balance c/d 2,25,333Dec.31Depreciation 1,53,000
   2,25,333   2,25,333
        
    2016   
2016   Jan.01Balance b/d 2,25,333
Dec.31Balance c/d 4,06,333Dec.31Depreciation 1,81,000
   4,06,333   4,06,333
        
    2017   
2017   Jan.01Balance b/d 4,06,333
Dec.31Balance c/d 5,87,333Dec.31Depreciation 1,81,000
   5,87,333   5,87,333
        

Question 6:

Azad Ltd. purchased furniture on October 01, 2014 for Rs 4,50,000. On March 01, 2015 it purchased another furniture for Rs 3,00,000. On July 01, 2016 it sold off the first furniture purchased in 2014 for Rs 2,25,000. Depreciation is provided at 15% p.a. on written down value method each year. Accounts are closed each year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on March 31, 2015, March 31, 2016 and March 31, 2017. Also give the above two accounts if furniture disposal account is opened.

ANSWER:

Books of Azad Ltd.
Furniture Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2014   2015   
Oct.01Bank (i) 4,50,000    
2015   Mar.31Balance c/d 7,50,000
Mar.01Bank (ii) 3,00,000    
   7,50,000   7,50,000
        
2015   2016   
Apr.01Balance b/d      
 (i) 4,50,000, (ii) 3,00,000 7,50,000Mar.31Balance c/d 7,50,000
   7,50,000   7,50,000
        
2016   2016   
Apr.01Balance b/d 7,50,000July 01Furniture Disposal 4,50,000
 (i) 4,50,000, (ii) 3,50,000  2005   
    Mar.31Balance c/d 3,00,000
   7,50,000   7,50,000
        
Accumulated Depreciation Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2015   2015   
Mar.31Balance c/d 37,500Mar.31Depreciation  
     (i) 33,750, (ii) 3,750 37,500
   37,500   37,500
        
2016   2015   
Mar.31Balance c/d 1,44,376Apr.01Balance b/d 37,500
    2016   
    Mar.31Depreciation  
     (i) 62,438, (ii) 44,378 1,06,876
   1,44,376   1,44,376
        
2016   2016   
July.01Furniture Disposal 1,09,456Apr.01Balance b/d 1,44,376
2017   July.01Depreciation (i) 13,268
Mar.31Balance c/d 85,9602017   
    Mar.31Depreciation (ii) 37,772
        
   1,95,416   1,95,416
        
Furniture Disposal Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2016   2016   
Jul.01Furniture 4,50,000Jul.01Accumulated Dep. 1,09,456
    Jul.01Bank 2,25,000
    Jul.01Profit and Loss (Loss) 1,15,544
        
   4,50,000   4,50,000
        

Working Note:

Furniture (i)

YearsOpening Balance Depreciation Closing Balance
2014 – 20154,50,00033,750 =4,16,250
2015 – 20164,16,25062,438 =3,53,812
20163,53,81213,268(3 months)=3,40,544
   1,09,456   
Balance on July 01, 20163,40,544     
Less: Sale on July 01, 2016(2,25,000)     
Loss on sale of furniture1,15,544     

Question 7:

M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2011 for Rs 1,00,000. On July 01, 2012 another machine costing Rs 2,50,000 was purchased. The machine purchased on April 01, 2011 was sold for Rs 25,000 on October 01, 2015. The company charges depreciation @15% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2016.

ANSWER:

Books of M/s. Lokesh Fabrics
Machinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2011   2012   
Apr.01Bank (i) 1,00,000Mar.31Depreciation 15,000
    Mar.31Balance c/d 85,000
        
   1,00,000   1,00,000
        
2012   2013   
Apr.01Balance b/d 85,000 Mar.31Depreciation  
July.01 Bank (ii) 2,50,000 (i) 15,000 + 28,125 43,125
    Mar.31Balance c/d  
     (i) 70,000, (ii) 2,21,875 2,91,875
   3,35,000   3,35,000
        
2013   2014   
Apr.01Balance b/d  Mar.31Depreciation  
  (i) 70,000, (ii) 2,21,875 2,91,875  (i) 15,000, (ii) 37,500 52,500
    Mar.31Balance c/d  
     (i) 55,000, (ii) 1,84,375 2,39,375
   2,91,875   2,91,875
        
2014   2015   
Apr.01Balance b/d  Mar.31Depreciation  
 (i) 5,500, (ii) 1,84,375  2,39,375 (i) 15,000, (ii) 37,500 52,500
    Mar.31Balance c/d  
     (i) 40,000, (ii) 1,46,875 1,86,875
        
   2,39,375   2,39,375
        
2015   2015   
Apr.01Balance b/d  Oct.01Depreciation 7,500
 (i) 40,000, (ii) 1,46,875 1,86,875Oct.01Machinery Disposal 32,500
    2016   
    Mar.31Depreciation (ii) 37,500
    Mar.31Balance c/d 1,09,375
        
   1,86,875   1,86,875
        
Machinery Disposal Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.Amount Rs
2015   2015   
Oct.01Machinery 32,500Oct.01Bank 25,000
    Oct.01Profit and Loss 7,500
   32,500   32,500
        

Question 8:

The following balances appear in the books of Crystal Ltd, on Jan 01, 2015

 Rs
Machinery account on15,00,000
Provision for depreciation account5,50,000

On April 01, 2015 a machinery which was purchased on January 01, 2012 for Rs 2,00,000 was sold for Rs 75,000. A new machine was purchased on July 01, 2015 for Rs 6,00,000. Depreciation is provided on machinery at 20% p.a. on Straight line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2015.

ANSWER:

Machinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2015   2015   
Jan.01Balance b/d 15,00,000Apr.01Machinery Disposal 2,00,000
 (13,00,000 + 2,00,000)      
Jul.01Bank 6,00,000Dec.31Balance c/d 19,00,000
   21,00,000   21,00,000
        
Provision for Depreciation Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2015   2015   
Apr.01Machinery Disposal 1,30,000Jan.01Balance b/d 5,50,000
Apr.01Balance c/d 7,50,000Apr.01Depreciation 10,000
    Dec.31Depreciation  
     (i) 2,60,000, (ii) 60,000 3,20,000
   8,80,000   8,80,000
        

Working Note:

Machine Sold on July 01, 2015

(i)YearsOpening Balance Depreciation Closing Balance
 20122,00,00040,000=1,60,000
 20131,60,00040,000=1,20,000
 20141,20,00040,000=80,000
 201580,00010,000=70,000
  Accumulated Depreciation=1,30,000  
       
Value on April 01, 2015= (70,000)    
Less: Sale= 75,000    
Profit on sale of Machinery  5,000    
          
Machinery Disposal Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2015   2015   
Apr.01Machinery 2,00,000Apr.01Provision for Depreciation 1,30,000
 Apr.01 Profit and Loss (Profit) 5,000 Apr.01 Bank 75,000
        
        
   2,05,000   2,05,000
        

Question 9:

M/s. Excel Computers has a debit balance of Rs 50,000 (original cost Rs 1,20,000) in computers account on April 01, 2010. On July 01, 2010 it purchased another computer costing Rs 2,50,000. One more computer was purchased on January 01, 2011 for Rs 30,000. On April 01, 2014 the computer which has purchased on July 01, 2010 became obsolete and was sold for Rs 20,000. A new version of the IBM computer was purchased on August 01, 2014 for Rs 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31 2011, 2012, 2013, 2014 and 2015. The computer is depreciated @10 p.a. on straight line method basis.

ANSWER:

Books of M/s Excel Computers
Computer Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.Amount Rs
2010   2011   
Apr.01Balance b/d (i) 50,000Mar.31Depreciation  
Jul.01Bank (ii) 2,50,000 (i) 12,000, (ii) 18,750,  
2011    (iii) 750 31,500
Jan.01Bank (iii) 30,000Mar.31Balance c/d  
     (i) 38,000, (ii) 2,31,250,  
     (iii) 29,250 2,98,500
   3,30,000   3,30,000
        
2011   2012   
Apr.01Balance b/d  Mar.31Depreciation  
 (i) 38,000, (ii) 2,31,250,   (i) 12,000 (ii) 25,000,  
 (iii) 29,250 2,98,500 (iii) 3,000 40,000
    Mar.31Balance c/d  
     (i) 26,000 (ii) 2,06,250,  
     (iii) 26,250 2,58,500
   2,98,500   2,98,500
        
2012   2013   
Apr.01Balance b/d  Mar.31Depreciation  
 (i) 26,000 (ii) 2,06,250,   (i) 12,000, (ii) 25,000, 40,000
 (iii) 26,250 2,58,500Mar.31(iii) 3,000  
     Balance c/d  
     (i) 14,000, (ii) 1,81,250,  
     (iii) 23,250 2,18,500
   2,58,500   2,58,500
        
2013   2014   
Apr.01Balance b/d  Mar.31Depreciation  
 (i) 14,000, (ii) 1,81,250,   (i) 12,000, (ii) 25,000, 40,000
 (iii) 23,250 2,18,500 (iii) 3,000  
    Mar.31Balance c/d  
     (i) 2,000, (ii) 1,56,250,  
     (iii) 20,250 1,78,500
   2,18,500   2,18,500
        
2014   2014   
Apr.01Balance c/d  Apr.01Bank (ii) 20,000
 (i) 2,000, (ii) 1,56,250,  Apr.01Profit and Loss (Loss) 1,36,250
 (iii) 20,250 1,78,5002015   
Aug.01Bank (iv) 80,000Mar.31Depreciation 10,333 
     (i) 2,000, (iii) 3,000, (iv) 5,333  
    Mar.31 Balance c/d  
     (iii) 17,250, (iv) 74,667 91,917
   2,58,500   2,58,500
        

Note: As per the solution, the closing balance, as on 31st March, 2005 is Rs 91,917; however, as per the book it is Rs 83,917.

Question 11:

Saraswati Ltd. purchased a machinery costing Rs 10,00,000 on January 01, 2011. A new machinery was purchased on 01 May, 2012 for Rs 15,00,000 and another on July 01, 2014 for Rs 12,00,000. A part of the machinery which originally cost Rs 2,00,000 in 2011 was sold for Rs 75,000 on April 30, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year.

ANSWER:

Books of Saraswati Ltd.Machinery Account
Dr.      Cr.
DateParticularsJ.F.Amount(₹)DateParticularsJ.F.Amount(₹)
2011   2011   
Jan.01Bank (i) 10,00,000    
 (8,00,000 + 2,00,000)  Dec.31Balance c/d 10,00,000
   10,00,000   10,00,000
        
2012   2012   
Jan.01Balance b/d 10,00,000Dec.31Balance c/d 25,00,000
May.01Bank (ii) 15,00,000  
 
  
   25,00,000   25,00,000
        
2013   2013   
Jan.01Balance b/d 25,00,000Dec.31Balance c/d 25,00,000
   25,00,000   25,00,000
        
2014   2014   
Jan.01Balance b/d 25,00,000Apr. 30Machinery Disposal 2,00,000
Jul.01Bank (ii) 12,00,000Dec.31Balance c/d  
     (i) 8,00,000 (ii) 15,00,000  
     (iii) 12,00,000 35,00,000
   37,00,000   37,00,000
        
2015   2015   
Jan.01Balance c/d 35,00,000Dec.31Balance c/d 35,00,000
   35,00,000   35,00,000
        
Provision for Depreciation Account
Dr.      Cr.
DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
2011   2011   
Dec.31Balance c/d 1,00,000    
    Dec.31Depreciation (i) 1,00,000
   1,00,000   1,00,000
        
2012   2012   
Dec.31Balance c/d 3,00,000Jan.01Balance c/d 1,00,000
    Dec.31Depreciation  
     (i) 1,00,000 (ii) 1,00,000 2,00,000
     (8 months)  
   3,00,000   3,00,000
        
2013   2013   
Dec.31Balance b/d 5,50,000Jan.01Balance c/d 3,00,000
    Dec.31Depreciation 2,50,000
   5,50,000 (i) 1,00,000 (ii) 1,50,000, 5,50,000
        
2014   2014   
Apr. 30Machinery Disposal 66,667Jan.01Balance b/d 5,50,000
Dec.31Balance c/d 7,80,000Apr. 30Depreciation 6,667
    Dec.31Depreciation  
     (i) 80,000, (ii) 1,50,000,  
     (iii) 60,000 2,90,000
   8,46,667   8,46,667
        
2015   2015   
Dec.31Balance c/d 11,30,000Jan.01Balance c/d 7,80,000
    Dec.31Depreciation  
     (i) 80,000, (ii) 1,50,000,  
     (iii) 1,20,000 3,50,000
   11,30,000   11,30,000
        
Machinery Disposal Account
Dr.      Cr.
DateParticularsJ.F.Amount(₹)DateParticularsJ.F.Amount(₹)
2014   2014   
Apr. 30Machinery 2,00,000Apr. 30Provision for Depreciation 66,667
    Apr. 30Bank 75,000
    Apr. 30Profit and Loss (Loss) 58,333
        
   2,00,000   2,00,000
        

Working Note:

 Opening Balance Depreciation Closing Balance
20112,00,00020,000=1,80,000
20121,80,00020,000=1,60,000
20131,60,00020,000=1,40,000
20141,40,0006,667=1,33,333
 Accumulated Depreciation 66,667  
Value on Apr. 30, 20141,33,333
Sale on   Apr. 30, 2014– 75,000
Loss on sale₹ 58,333

Page No 273:

Question 10:

Carriage Transport Company purchased 5 trucks at the cost of Rs 2,00,000 each on April 01, 2011. The company writes off depreciation @ 20% p.a. on original cost and closes its books on December 31, every year. On October 01, 2013, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay Rs 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for Rs 1,00,000 and spent Rs 20,000 on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2013. Also give truck account if truck disposal account is prepared.

ANSWER:

Books of Carriage Transport Company
Truck Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2011   2011   
Apr.01Bank 10,00,000Dec.31Balance c/d 10,00,000
   10,00,000   10,00,000
        
2012   2012   
Jan.01Balance b/d 10,00,000Dec.31Balance c/d 10,00,000
   10,00,000   10,00,000
        
2013   2013   
Jan.01Balance b/d 10,00,000Oct.01Truck Disposal 2,00,000
Oct.01Bank 1,20,000Dec.31Balance c/d 9,20,000
   11,20,000   11,20,000
        
Provision for Depreciation Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2011   2011   
Dec.31Balance c/d 1,50,000Dec.31Depreciation 1,50,000
   1,50,000   1,50,000
        
2012   2012   
Dec.31Balance c/d 3,50,000Jan.01Balance c/d 1,50,000
    Dec.31Depreciation 2,00,000
   3,50,000   3,50,000
        
2013   2013   
Oct.01Truck Disposal 1,00,000Jan.01Balance b/d 3,50,000
Oct.01Balance c/d 4,46,000Oct.01Depreciation (9 Months) 30,000
    Dec.31Depreciation  
     (1,60,000 + 6,000) 1,66,000
        
   5,46,000   5,46,000
        
Truck Disposal Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2013   2013   
Oct.01Truck 2,00,000Oct.01Provision for Depreciation 1,00,000
    Oct.01Insurance Co. (Insurance Claim) 70,000
    Oct.01Profit and Loss (Loss) 30,000
        
   2,00,000   2,00,000
        

Working Note:

Truck involved in accident

 Opening Balance Depreciation Closing Balance 
Apr.01, 20112,00,00030,000=1,70,000 
Jan.01, 20121,70,00040,000=1,30,000 
Jan.01, 20131,30,00030,000=1,00,000 
 Accumulated Depreciation=1,00,000   
 
Value on Oct.01, 2013=1,00,000 
Less: Insurance Claim=70,000 
Loss on Accident 30,000 
          

Question 12:

On July 01, 2011 Ashwani purchased a machine for Rs 2,00,000 on credit. Installation expenses Rs 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be Rs 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2011 and prepare necessary ledger accounts for first three years.

ANSWER:

Books of AshwaniJournal
Date Particulars L.F.Debit Amount RsCredit Amount Rs
2011      
Jul.01Machinery A/cDr. 2,25,000 
  To Creditors for Machinery A/c   2,00,000
  To Bank A/c   25,000
 (Machinery bought on credit and Rs 25,000 paid for installation through cheque)   
      
2011      
Dec.31Depreciation A/cDr. 20,500 
  To Machinery A/c   20,500
 (Depreciation charged on Machinery)    
      
2011      
Dec.31Profit and Loss A/cDr. 20,500 
  To Depreciation A/c   20,500
 (Depreciation transferred to Profit and Loss Account)    
       
2012      
Dec.31Depreciation A/cDr. 41,000 
  To Machinery A/c   41,000
 (Depreciation charged on Machinery)    
       
2012      
Dec.31Profit and Loss A/cDr. 41,000 
  To Depreciation A/c   41,000
 (Depreciation transferred to Profit and Loss Account)    
       
2013      
Dec.31Depreciation A/cDr. 41,000 
  To Machinery A/c   41,000
 (Depreciation charged on Machinery)    
2013      
Dec.31 Profit and Loss A/cDr. 41,000 
  To Depreciation A/c   41,000
 (Depreciation transferred to Profit and Loss Account)    
      
        
LedgerMachinery Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2011   2011   
Jul.01Creditors for Machinery 2,00,000Dec.31Depreciation 20,500
Jul.01Bank 25,000Dec.31Balance c/d 2,04,500
   2,25,000   2,25,000
        
2012   2012   
Jan.01Balance b/d 2,04,500Dec.31Depreciation 41,000
    Dec.31Balance c/d 1,63,500
   2,04,500   2,04,500
        
2013   2013   
Jan.01Balance c/d 1,63,500Dec.31Depreciation 41,000
    Dec.31Balance c/d 1,22,500
   1,63,500   1,63,500
        

Working Note:

Calculation of annual depreciation

Depreciation (p.a.)=(2,00,000 + 25,000 – 20,000)
5
 =Rs 41,000 per annum

Question 13:

On October 01, 2010, a Truck was purchased for Rs 8,00,000 by Laxmi Transport Ltd. Depreciation was provided at 15% p.a. on the diminishing balance basis on this truck. On December 31, 2013 this Truck was sold for Rs 5,00,000. Accounts are closed on 31st March every year. Prepare a Truck Account for the four years

ANSWER:

Books of Laxmi Transport Ltd.Truck Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2010   2011   
Oct.01Bank 8,00,000Mar.31Depreciation 60,000
    Mar.31Balance c/d 7,40,000
   8,00,000   8,00,000
        
2011   2012   
Apr.01Balance b/d 7,40,000Mar.31Depreciation 1,11,000
    Mar.31Balance c/d 6,29,000
   7,40,000   7,40,000
        
2012   2013   
Apr.01Balance b/d 6,29,000Mar.31Depreciation 94,350
     Mar.31Balance c/d 5,34,650
   6,29,000   6,29,000
        
2013   2013   
Apr.01Balance b/d 5,34,650Dec.31Depreciation (9 months) 60,148
Dec.31Profit and Loss (Profit) 25,498Dec.31Bank 5,00,000
   5,60,148   5,60,148
        

Note: As per the solution, the profit on the sale of truck, as on December 31, 2013 is Rs 25,498; however, the answer given in the book is Rs 58,237.

Question 14:

Kapil Ltd. purchased a machinery on July 01, 2011 for Rs 3,50,000. It purchased two additional machines, on April 01, 2012 costing Rs 1,50,000 and on October 01, 2012 costing Rs 1,00,000. Depreciation is provided @10% p.a. on straight line basis. On January 01, 2013, first machinery become useless due to technical changes. This machinery was sold for Rs 1,00,000, prepare machinery account for 4 years on the basis of calendar year.

ANSWER:

Books of Kapil Ltd. Machinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2011   2011   
Jul.01Bank (i) 3,50,000Dec.31Depreciation (6 months) 17,500
    Dec.31Balance c/d 3,32,500
   3,50,000   3,50,000
        
2012   2012   
Jan.01Balance c/d 3,32,500Dec.31Depreciation  
Apr.01Bank (ii) 1,50,000 (i) 35,000 (ii) 11,250 (9 months),  
Oct.01Bank (iii) 1,00,000 (iii) 2,500 (3 months) 48,750
    Dec.31Balance c/d  
     (i) 2,97,500, (ii) 1,38,750,  
     (iii) 97,500 5,33,750
        
   5,82,500   5,82,500
        
2013   2013   
Jan.01(i) 2,97,500, (ii) 1,38,750,  Jan.01Bank (i) 1,00,000
 (iii) 97,500 5,33,750Jan.01Profit and Loss (Loss) 1,97,500
    Dec.31Depreciation  
     (ii) 15,000 (iii) 10,000 25,000
    Dec.31Balance c/d  
     (ii) 1,23,750, (iii) 87,500 2,11,250
        
   5,33,750   4,33,750
        
2014   2014   
Jan.01Balance c/d 2,11,250Dec.31Depreciation  
 (ii) 1,23,750, (iii) 87,500  Dec.31(ii) 15,000, (iii) 10,000 25,000
     Balance c/d  
     (ii) 1,08,750, (iii) 77,500 1,86,250
   2,11,250   2,11,250
2015       
Jan.01Balance b/d 1,86,250    
        

Page No 274:

Question 15:

On January 01, 2011, Satkar Transport Ltd, purchased 3 buses for Rs 10,00,000 each. On July 01, 2013, one bus was involved in an accident and was completely destroyed and Rs 7,00,000 were received from the Insurance Company in full settlement. Depreciation is writen off @15% p.a. on diminishing balance method. Prepare bus account from 2011 to 2014. Books are closed on December 31 every year.

ANSWER:

Books of Satkar Transport Ltd.Bus Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2011   2011   
Jan.01Bank 30,00,000Dec.31Depreciation 4,50,000
    Dec.31Balance c/d 25,50,000
        
   30,00,000   30,00,000
        
2012   2012   
Jan.01Balance b/d 25,50,000Dec.31Depreciation 3,82,500
    Dec.31Balance c/d 21,67,500
   25,50,000   25,50,000
        
2013   2013   
Jan.01Balance b/d 21,67,500July.01Depreciation (6 months) 54,187
July.01Profit and Loss (Profit) 31,687July.01Insurance Co. (Insurance claim) 7,00,000
    Dec.31Depreciation 2,16,750
    Dec.31Balance c/d 12,28,250
   21,99,187   21,99,187
        
2014   2014   
Jan.01Balance c/d 12,28,250Dec.31Depreciation 1,84,237
    Dec.31Balance c/d 10,44,013
   12,28,250   12,28,250
        

Question 16:

On October 01, 2011 Juneja Transport Company purchased 2 Trucks for Rs 10,00,000 each. On July 01, 2013, One Truck was involved in an accident and was completely destroyed and Rs 6,00,000 were received from the insurance company in full settlement. On December 31, 2013 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for Rs 1,50,000. On January 31, 2014 company purchased a fresh truck for Rs 12,00,000. Depreciation is to be provided at 10% p.a. on the written down value every year. The books are closed every year on March 31. Give the truck account from 2011 to 2014.

ANSWER:

Books of Juneja Transport Company Truck Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2011   2012   
Oct.01Bank 20,00,000Mar.31Depreciation 1,00,000
    Mar.31Balance c/d 19,00,000
        
   20,00,000   20,00,000
        
2012   2013   
Apr.01Balance b/d 19,00,000Mar.31Depreciation 1,90,000
    Mar.31Balance c/d 17,10,000
   19,00,000   19,00,000
        
2013   2013   
Apr.01Balance b/d 17,10,000Jul.01Depreciation (3 Month on one Truck) 21,375
    Jul.01Bank (Insurance Claim) 6,00,000
2014   Jul.01 Profit and Loss (loss) 2,33,625
Jan.31Bank 12,00,000    
    Dec.31Depreciation (9 Month on II Truck) 64,125
    Dec.31Bank 1,50,000
    Dec.31Profit and Loss (Loss) 6,40,875
    2014   
    Mar.31Depreciation (2 Months) 20,000
    Mar.31Balance c/d 11,80,000
        
   29,10,000   29,10,000
        

Note: As per solution, loss on truck one is as Rs 2,33,625; however, as per NCERT book, loss is of Rs 3,26,250.

Truck – 1

 Opening BalanceDepreciation=Closing Balance
Oct.01, 201110,00,00050,000 (6 Months)=9,50,000
Apr.01, 20129,50,00095,000=8,55,000
Apr.01, 20138,55,00021,375 (3 Months)=8,33,625
Value on July 01, 2013=8,33,625
Insurance Claim=–  6,00,000
Loss on Truck – 1=Rs 2,33,625

 Truck – 2

 Opening BalanceDepreciation=Closing Balance
Oct.01, 201210,00,00050,000 (6 Months)=9,50,000
Apr.01, 20129,50,00095,000=8,55,000
Apr.01, 20138,55,00064,125 (9 Months)=7,90,875
Value on Dec.31, 2013=7,90,875
Sale of Truck=–  1,50,000
Loss on Truck – 2=Rs 6,40,875

Page No 274:

Question 17:

A Noida based Construction Company owns 5 cranes and the value of this asset in its books on April 01, 2017 is Rs 40,00,000. On October 01, 2017 it sold one of its cranes whose value was Rs 5,00,000 on April 01, 2017 at a 10% profit. On the same day it purchased 2 cranes for Rs 4,50,000 each. Prepare cranes account. It closes the books on December 31 and provides for depreciation on 10% written down value.

ANSWER:

Cranes Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2017   2017   
Apr.01Machinery (35,00,000 + 5,00,000) 40,00,000Oct.01Depreciation 25,000
Oct.01Profit and Loss (Profit) 47,500Oct.01Bank 5,22,500
Oct.01Bank 9,00,000Dec.31Depreciation  
     35,00,000 ×10×9 = 2,62,500  
10012
     9,00,000 ×10×6 = 22,500 2,85,000
10012
    Dec.31Balance c/d  
     32,37,500 + 8,77,500 41,15,000
        
   49,47,500   49,47,500
        

Question 18:

Shri Krishan Manufacturing Company purchased 10 machines for Rs 75,000 each on July 01, 2014. On October 01, 2016, one of the machines got destroyed by fire and an insurance claim of Rs 45,000 was admitted by the company. On the same date another machine is purchased by the company for Rs 1,25,000.

The company writes off 15% p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2014 to 2017.

ANSWER:

Books of Shri Krishna Manufacturing CompanyMachinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2014   2014   
Jul.01Bank 7,50,000Dec.31Depreciation 56,250
    Dec.31Balance c/d 6,93,750
        
   7,50,000   7,50,000
        
2015   2015   
Jan.01Balance b/d 6,93,750Dec.31Depreciation 1,04,063
    Dec.31Balance c/d 5,89,687
   6,93,750   6,93,750
        
2016   2016   
Jan.01Balance b/d 5,89,687Oct.01Depreciation (9 months 6,634
     for one machine)  
Oct.01Bank 1,25,000Oct.01Insurance Co. 45,000
    Oct.01Profit and Loss (Loss) 7,335
    Dec.31Depreciation  
     (i) 79,608, (ii) 4,688 84,296
    Dec.31Balance c/d  
     (i) 4,51,110, (ii) 1,20,312 5,71,422
   7,14,687   7,14,687
        
2017   2017   
Jan.01Balance b/d  Dec.31Depreciation  
 (i) 4,51,110, (ii) 1,20,312 5,71,422 (i) 67,667, (ii) 18,047 85,714
    Dec.31Balance c/d  
     (i) 3,83,443, (ii) 1,02,265 4,85,708
        
   5,71,422   5,71,422
        

Working Note:

Machine Costing Rs 75,000 sold on Oct.01, 2002

 Opening BalanceDepreciation=Closing Balance
Jul.01, 201475,0005,625(6 months)=69,375
Jan.01, 201569,37510,406=58,969
Jan.01, 201658,9696,634(9 months)=52,335
Value on Oct.01, 2016 52,335
Insurance Claim – 45,000
Loss Rs 7,335

Question 19:

On January 01, 2014, a Limited Company purchased machinery for Rs 20,00,000. Depreciation is provided @15% p.a. on diminishing balance method. On March 01, 2016, one fourth of machinery was damaged by fire and Rs 40,000 were received from the insurance company in full settlement. On September 01, 2016 another machinery was purchased by the company for Rs 15,00,000.

Write up the machinery account from 2016 to 2017. Books are closed on December 31, every year.

ANSWER:

Machinery Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2016   2016   
Jan.01Balance b/d (i)(10,83,750 + 3,61,250) 14,45,000Mar.01Depreciation (1/4 Machinefor 2 Months) 9,031
Sep.01Bank (ii) 15,00,000Mar.01Bank 40,000
    Mar.01Profit and Loss 3,12,219
    Dec.31Depreciation (i)  
     (i) 1,62,563 (3/4th of  machine),(ii) 75,000 2,37,563
    Dec.31Balance c/d  
     (i) 9,21,187, (ii) 14,25,000 23,46,187
        
        
   29,45,000   29,45,000
        
2017   2017   
Jan.01Balance b/d  Dec.31Depreciation  
 (i) 9,21,187, (ii) 14,25,000 23,46,187Dec.31(i) 1,38,177, (ii) 2,13,750 3,51,927
     Balance c/d  
     (i) 7,83,009, (ii) 12,11,250 19,94,260
   23,46,187   23,46,187
        

 Working Note:

Machine (i)

      
YearsJanuary 01 Depreciation(15% p.a.)=Closing Balance
201420,00,0003,00,000=17,00,000
201517,00,0002,55,000=14,45,000
201614,45,000    

1/4th of Machine (i)

      
YearsOpening Balance Depreciation (15% p.a.)=Closing Balance
20145,00,00075,000=4,25,000
20154,25,00063,750=3,61,250
20163,61,2509,031 (2 months)=3,52,219
Value on 1 Mar. 2016=3,52,219
Insurance Claim=40,000
Loss Rs 3,12,219

Page No 275:

Question 20:

A Plant was purchased on 1st July, 2015 at a cost of Rs 3,00,000 and Rs 50,000 were spent on its installation. The depreciation is written off at 15% p.a. on the straight line method. The plant was sold for Rs 1,50,000 on October 01, 2017 and on the same date a new Plant was installed at the cost of Rs 4,00,000 including purchasing value. The accounts are closed on December 31 every year.

Show the machinery account and provision for depreciation account for 3 years

ANSWER:

Plant Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2015   2015   
July.01Bank 3,50,000Dec.31Balance c/d 3,50,000
   3,50,000   3,50,000
        
2016   2016   
Jan.01Balance b/d 3,50,000    
    Dec.31Balance c/d 3,50,000
   3,50,000   3,50,000
        
2017   2017   
Jan.01Balance b/d 3,50,000Oct.01Provision for Depreciation 1,18,125
Oct.01Bank 4,00,000Oct.01Bank 1,50,000
    Oct.01Profit and Loss 81,875
    Dec.31Balance c/d 4,00,000
   7,50,000   7,50,000
        
Provision for Depreciation Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2015   2015   
Dec.31Balance c/d 26,250Dec.31Depreciation 26,250
   26,250   26,250
        
2016   2016   
Dec.31Balance b/d 78,750Jan.01Balance c/d 26,250
    Dec.31Depreciation 52,500
   78,750   78,750
        
2017   2017   
Oct.01Plant 1,18,125Jan.01Balance b/d 78,750
 Dec.31Balance c/d 15,000Oct.01Depreciation (i) (9 months) 39,375
    Dec.31Depreciation (ii) (3 months) 15,000
   1,33,125   1,33,125
        

Question 21:

An extract of Trial balance from the books of Tahiliani and Sons Enterprises on Marc 31 2017 is given below:

Name of the AccountDebit AmountRsCredit AmountRs
   
Sundry debtors50,000 
Bad debts6,000 
Provision for doubtful debts 4,000

Additional Information:

  •          Bad Debts proved bad; however, not recorded amounted to Rs 2,000.
  •          Provision is to be maintained at 8% of debtors

Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also, show the necessary accounts.

ANSWER:

Date Particulars L.F.Debit Amount RsCredit Amount Rs
       
 Bad Debt A/cDr. 2,000 
  To Debtors A/c   2,000
 (Further bad debt charged from Debtors Account)    
      
 Provision for Doubtful Debt A/cDr. 8,000 
  To Bad Debt A/c   8,000
 (Amount of bad debt transferred toProvision for Doubtful Debt Account)   
      
 Profit and Loss A/cDr. 7,840 
  To Provision for Doubtful Debt A/c   7,840
 (Amount of Provision for Doubtful Debt transferred to Profit and Loss Account)   
      
Bad Debt Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2017   2017   
Mar.31Balance b/d 6,000Mar.31Provision for Doubtful  
Mar.31Debtors 2,000 Debt  8,000
   8,000   8,000
        
Debtors Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2017   2017   
Mar.31Balance b/d 50,000Mar.31Bad Debt 2,000
    Mar.31Balance c/d 48,000
   50,000   50,000
        
Provision for Doubtful Debts Account
Dr.      Cr.
DateParticularsJ.F.Amount RsDateParticularsJ.F.Amount Rs
2017    2017   
31 Mar.Bad Debt (6,000 + 2,000) 8,000Apr.01Balance b/d 4,000
31 Mar.Balance c/d 3,840Mar.31Profit and Loss 7,840
   11,840   11,840
        

Question 22:

The following information is extracted from the Trial Balance of M/s Nisha Traders on 31 March 2017.

Sundry Debtors80,500
Bad Debts1,000
Provision for Bad Debts5,000

Additional Information

Bad Debts Rs 500

Provision is to be maintained at 2% of Debtors

Prepare bad debts account, Provision for bad debts account and profit and loss account.

ANSWER:

Bad Debt Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2017   2017    
Mar.31Balance b/d 1,000Mar.31Provision for Bad Debts 1,500
Mar.31Debtors 500    
   1,500   1,500
        
Provision for Bad debt Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.AmountRs
2017   2017   
Mar.31Bad Debt 1,500Mar.31Balance b/d 5,000
Mar.31Profit and Loss 1,900    
Mar.31Balance c/d 1,600    
   5,000   5,000
        
Profit and Loss Account
Dr.      Cr.
DateParticularsJ.F.AmountRsDateParticularsJ.F.Amount Rs
    2017    
     Mar.31Provision for Bad Debts 1,900
        
        

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