On 1st July 2016 a company purchased a machine for Rs 3,90,000 and spent Rs 10,000 on its installation. It decided to provide depreciation at 15% per annum using the written down v... On 1st July 2016 a company purchased a machine for Rs 3,90,000 and spent Rs 10,000 on its installation. It decided to provide depreciation at 15% per annum using the written down value method. On 30th November 2019 the machine was sold for Rs 100,000. On 1st December 2019 the company acquired a new machine at a total cost of Rs 7,60,000. Depreciation was provided on the new machine on the same basis as had been used in the case of the earlier machine. The company closes its books of account every year on 31st March. Prepare the necessary accounts from 2016-17 to 2019-20.
Understand the Problem
The question is asking to prepare the necessary accounts for depreciation of machinery that the company acquired and operated over specific dates. It details the initial purchase, annual depreciation rates, and sale of a machine, requiring calculations based on these parameters.
Answer
Total depreciation calculated over the period is Rs 45,000 in 2016-17, Rs 53,250 in 2017-18, Rs 45,262.50 in 2018-19, and Rs 54,038.13 for 2019-20.
Answer for screen readers
The necessary accounts from 2016-17 to 2019-20 will reflect:
- 2016-17: Depreciation = Rs 45,000
- 2017-18: Depreciation = Rs 53,250
- 2018-19: Depreciation = Rs 45,262.50
- 2019-20: Depreciation for old machine = Rs 16,038.13 and for new machine = Rs 38,000.
Steps to Solve
- Calculate the Cost of the Machine
The total cost of the machine includes the purchase price and installation costs.
[ \text{Cost of the machine} = \text{Purchase price} + \text{Installation costs} ]
Given:
[ \text{Cost} = 390,000 + 10,000 = 400,000 ]
- Determine the Annual Depreciation
Using the written down value method, the annual depreciation is calculated as:
[ \text{Depreciation} = \text{Book Value} \times \text{Depreciation Rate} ]
Where the depreciation rate is 15%.
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Calculate Depreciation for Each Year
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For 2016-17 (9 months): [ \text{Depreciation} = 400,000 \times 0.15 \times \frac{9}{12} = 45,000 ]
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For 2017-18 (full year): [ \text{Book Value at start of year} = 400,000 - 45,000 = 355,000 ]
[ \text{Depreciation} = 355,000 \times 0.15 = 53,250 ]
- For 2018-19 (full year): [ \text{Book Value} = 355,000 - 53,250 = 301,750 ]
[ \text{Depreciation} = 301,750 \times 0.15 = 45,262.50 ]
- For 2019-20 (up to November): [ \text{Book Value} = 301,750 - 45,262.50 = 256,487.50 ]
Since sold on November 30, we calculate for 5 months: [ \text{Depreciation} = 256,487.50 \times 0.15 \times \frac{5}{12} \approx 16,038.13 ]
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Calculate Book Value at Sale
After depreciation for 2019, calculate the book value before selling the machine:
[ \text{Book Value before Sale} = 256,487.50 - 16,038.13 \approx 240,449.37 ]
- Prepare Accounts for New Machine
On December 1, 2019:
[ \text{Cost of new machine} = 760,000 ]
Calculate the depreciation for the new machine:
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For 2019-20: [ \text{Depreciation} = 760,000 \times 0.15 \times \frac{4}{12} = 38,000 ]
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For 2020-21 (full year): [ \text{Depreciation} = (760,000 - 38,000) \times 0.15 \approx 108,300 ]
The necessary accounts from 2016-17 to 2019-20 will reflect:
- 2016-17: Depreciation = Rs 45,000
- 2017-18: Depreciation = Rs 53,250
- 2018-19: Depreciation = Rs 45,262.50
- 2019-20: Depreciation for old machine = Rs 16,038.13 and for new machine = Rs 38,000.
More Information
The calculations reflect the accrued depreciation and the effective cost of machinery upon sale. The book value method helps in systematically reducing the asset's value over time.
Tips
- Miscalculating the depreciation time period (e.g., not adjusting for the partial year).
- Forgetting to update the book value before calculating the next year's depreciation.
- Incorrectly interpreting depreciation rates.
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