(b) S Chand & Associates purchased a machine for 300000 on 1.1.2021. Another machine costing 450000 was purchased on 1.7.2022. On 31.12.2023 the machine purchased on 1.1.2021 was s... (b) S Chand & Associates purchased a machine for 300000 on 1.1.2021. Another machine costing 450000 was purchased on 1.7.2022. On 31.12.2023 the machine purchased on 1.1.2021 was sold for 150000. The company provides depreciation at 15% on Written Down Value Method. The company closes its accounts on 31st December every year. Prepare – (i) Machinery Account, (ii) Machinery Disposal Account and (iii) Provision for Depreciation Account.
Understand the Problem
The question is asking us to prepare three financial accounts related to the machinery purchased by S Chand & Associates, including the Machinery Account, Machinery Disposal Account, and Provision for Depreciation Account, considering the depreciation at 15% using the Written Down Value method.
Answer
Initial Purchase Amount: $P$, Depreciation for Year 1: $P \times 15\%$, Adjusted Book Value: $P - (P \times 15\%)$.
Answer for screen readers
To achieve the full accounting entries for S Chand & Associates machinery, the following accounts will need to be maintained:
-
Machinery Account:
- Initial Purchase Amount: $P$
- Depreciation for Year 1: $P \times 15%$
-
Machinery Disposal Account:
- Sale Price: (if applicable)
- Adjusted Book Value: $P - (\text{Accumulated Depreciation})$
-
Provision for Depreciation Account:
- Annual Depreciation recorded: $P \times 15%$
Steps to Solve
- Create the Machinery Account
This account will record the acquisition of the machinery and the depreciation expense. The initial purchase amount should be noted.
- Calculate Depreciation for the First Year
To calculate the depreciation expense for the first year, apply the Written Down Value (WDV) method. If the machinery was purchased for $P$, the first-year depreciation is:
$$ \text{Depreciation} = P \times 15% $$
- Prepare the Machinery Disposal Account
If the machinery is sold, create an account noting the sale price and the adjusted book value (purchase price - accumulated depreciation) prior to disposal.
- Calculate Accumulated Depreciation
This will be the total depreciation expense from the beginning until the point of disposal:
$$ \text{Accumulated Depreciation} = \text{Depreciation for 1st year} $$
- Create the Provision for Depreciation Account
In this account, credit the annual depreciation calculated and keep a running total of the provision for depreciation over the years until disposal.
To achieve the full accounting entries for S Chand & Associates machinery, the following accounts will need to be maintained:
-
Machinery Account:
- Initial Purchase Amount: $P$
- Depreciation for Year 1: $P \times 15%$
-
Machinery Disposal Account:
- Sale Price: (if applicable)
- Adjusted Book Value: $P - (\text{Accumulated Depreciation})$
-
Provision for Depreciation Account:
- Annual Depreciation recorded: $P \times 15%$
More Information
This calculation helps in understanding how machinery affects financial records through depreciation. The Written Down Value method is commonly used as it reflects the decreasing value of an asset over time. This approach allows businesses to account for the loss in value of machinery accurately and prepare for future asset disposal.
Tips
- Not applying the correct percentage for depreciation. Ensure that the depreciation rate of 15% is consistently used.
- Failing to update the Machinery Account after each year. Always keep track of accumulated depreciation accurately.
- Miscalculating the sale price or adjusted book value during disposal. Double-check the calculations.
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