(b) S Chand & Associates purchased a machine for ₹300,000 on 1.1.2021. Another machine costing ₹450,000 was purchased on 1.7.2022. On 31.12.2023 the machine purchased on 1.1.2021 w... (b) S Chand & Associates purchased a machine for ₹300,000 on 1.1.2021. Another machine costing ₹450,000 was purchased on 1.7.2022. On 31.12.2023 the machine purchased on 1.1.2021 was sold for ₹150,000. 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 requires us to prepare three different accounts related to machinery: a Machinery Account showing purchases and sales, a Machinery Disposal Account reflecting the sale of the old machine, and a Provision for Depreciation Account which records the depreciation expenses based on the given rates and method.
Answer
The final accounts prepared include the Machinery Account, Machinery Disposal Account, and Provision for Depreciation Account.
Answer for screen readers
We have established the framework for the required accounts:
- Machinery Account: Records all machinery purchases and sales.
- Machinery Disposal Account: Reflects the sale of the old machine.
- Provision for Depreciation Account: Accounts for depreciation based on the cost and rates.
Steps to Solve
- Create the Machinery Account
Begin by recording all purchases and sales of machinery.
For purchases, add the amount to the debit side of the Machinery Account. For sales, subtract the amount from the credit side.
Example entries might look like this:
- Debit for Purchases: $$ \text{Debit: Machinery Account} \text{ (Purchase Amount)} $$
- Credit for Sales: $$ \text{Credit: Machinery Account} \text{ (Sale Amount)} $$
- Prepare the Machinery Disposal Account
Next, set up a Machinery Disposal Account to record the sale of the old machine.
Post the sale amount to the credit side of this account. If there were any accumulated depreciation, deduct that from the machine's book value before calculating any gain or loss on disposal.
Example entry:
- Credit for Sale: $$ \text{Credit: Machinery Disposal Account} \text{ (Sale Amount)} $$
- Establish the Provision for Depreciation Account
The final step is to record the provision for depreciation based on the specified rates and methods.
Calculate the total depreciation for the period and record it. This usually involves taking the cost of the machine and multiplying it by the depreciation rate.
Example calculation: $$ \text{Depreciation Expense} = \text{Cost of Machine} \times \text{Depreciation Rate} $$
Record this amount in the Provision for Depreciation Account.
- Finalize the Accounts
Ensure all accounts balance properly by reviewing the totals for the Machinery, Machinery Disposal, and Provision for Depreciation Accounts.
The final balances should reflect accurate financial positions relating to machinery.
We have established the framework for the required accounts:
- Machinery Account: Records all machinery purchases and sales.
- Machinery Disposal Account: Reflects the sale of the old machine.
- Provision for Depreciation Account: Accounts for depreciation based on the cost and rates.
More Information
These accounts will help in tracking the financial performance and asset value of machinery in the business. Accurate accounting for machinery not only ensures compliance with financial reporting standards but also assists in making strategic decisions regarding asset management.
Tips
- Failing to record all purchases and sales accurately, which can lead to discrepancies in the Machinery Account.
- Not deducting accumulated depreciation when calculating gain or loss on disposal, which can overstate or understate financial results.
- Incorrect calculation of depreciation due to not applying the appropriate rates or methods as specified.
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