On 1st April 2014, Max Co. Ltd. purchased a Machine for Rs. 200,000 and spent Rs. 20,000 on its installation. On 30.09.2015 it purchased another machine for Rs. 1,00,000. On 01.01.... On 1st April 2014, Max Co. Ltd. purchased a Machine for Rs. 200,000 and spent Rs. 20,000 on its installation. On 30.09.2015 it purchased another machine for Rs. 1,00,000. On 01.01.2017, it sold the Machine which was purchased on 30.09.2015 for Rs. 90,000. The company charges depreciation at 10% p.a. on Straight Line Method. Prepare Machine Account and Depreciation Account in the books of Max Co. Ltd. for first three years. The accounts are closed on 31st March every year. (Ans- Balance of Machine Account on 31.03.2017 Rs. 1,54,000/- and Profit on sale of Machine Rs.2,500). Read more

Steps to Solve

1. Record Initial Machinery Purchases
   On 1st April 2014, Max Co. Ltd. purchased a machine for Rs. 200,000 and spent Rs. 20,000 on its installation.
   Total cost of the first machine:
   $$ \text{Total Cost} = 200,000 + 20,000 = 220,000 $$

2. Record Second Machine Purchase
   On 30th September 2015, Max Co. Ltd. purchased another machine for Rs. 100,000.
   This adds to the Machine Account:
   Total cost by 30th September 2015:
   $$ \text{Total Cost} = 220,000 + 100,000 = 320,000 $$

3. Calculate Depreciation for the First Machine
   For the first machine, the depreciation rate is 10% per annum using the straight-line method.

For the financial year ending 31st March 2015 (1 year):
$$ \text{Depreciation} = 220,000 \times 0.10 = 22,000 $$

For the financial year ending 31st March 2016 (1 year):
$$ \text{Depreciation} = 220,000 \times 0.10 = 22,000 $$

For the financial year ending 31st March 2017 (1 year):
$$ \text{Depreciation} = 220,000 \times 0.10 = 22,000 $$

4. Calculate Depreciation for the Second Machine
   For the second machine (Rs. 100,000), it was purchased on 30th September 2015, so it will incur depreciation for half a year for the period ending 31st March 2016, then a full year for 2017.

For the financial year ending 31st March 2016 (0.5 year):
$$ \text{Depreciation} = 100,000 \times 0.10 \times \frac{1}{2} = 5,000 $$

For the financial year ending 31st March 2017 (1 year):
$$ \text{Depreciation} = 100,000 \times 0.10 = 10,000 $$

5. Total Depreciation Calculation
   Combine the depreciation amounts for both machines:

• For 2015-16:
  $$ \text{Total Depreciation} = 22,000 + 5,000 = 27,000 $$

• For 2016-17:
  $$ \text{Total Depreciation} = 22,000 + 10,000 = 32,000 $$

6. Calculate Account Balances
   Machine account balance before selling the second machine:
   $$ \text{Balance as of 31st March 2017} = 320,000 - (22,000 + 22,000 + 22,000 + 5,000 + 10,000) = 320,000 - 81,000 = 239,000 $$

7. Account for the Sale of the Machine
   The machine sold on 01.01.2017 for Rs. 90,000 had accumulated depreciation.
   Total depreciation until the sale:
   $$ \text{Total Depreciation} = 22,000 + 5,000 + 10,000 = 37,000 $$
   Book value before sale:
   $$ \text{Book Value} = 100,000 - 37,000 = 63,000 $$
   Profit/Loss on sale:
   $$ \text{Profit} = \text{Sale Price} - \text{Book Value} = 90,000 - 63,000 = 27,000 $$

8. Final Machine Account Balance
   After selling the machine:
   $$ \text{Final Balance} = 239,000 - 100,000 = 139,000 $$