# MGT101 - Financial Accounting - I - Lecture Handout 20

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# DEPRECIATION ON PURCHASE AND DISPOSAL OF FIXED ASSETS

If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to the balance sheet date are transferred to an account called Capital Work in Progress Account. This account is shown separately in the balance sheet below the fixed asset. Capital work in progress account contains all expenses incurred on the asset until it is converted into working condition. All these expenses will become part of the cost of that asset. When any expense is incurred or paid, it is included in the Capital Work in Progress Account through the following entry:

Debit: Work in Progress Account
Credit: Cash/Bank/Payable Account

When an asset is completed and it is ready to work, all costs will transfer to the relevant asset account through the following entry:

Debit: Relevant asset account
Credit: Capital work in progress account

## Presentation

It is already mentioned that Work in Progress Account is shown separately in the balance sheet below the fixed asset. i-e.

 Name of the Entity Balance Sheet As At………. Particulars Amount Rs. Amount Rs. Assets Fixed Assets Capital Work in Progress Other Long Term Assets Current Assets xyz xyz xyz Total xyz Liabilities Capital Profit xyz xyz xyz Long Term Liabilities Current Liabilities xyz Total xyz

Consider the solved illustration in the previous lecture:

### Depreciation on the basis of use

 Date Purchase of machine (Rs.) Depreciation (Rs.) Accumulated depreciation (Rs.) Total Accum. Dep. Written Down Value (Rs.) Total Written Down Value (Rs.) 01-09-2000 100,000 Machine # 1 100,000 x 25% x10/12=20,833 Machine # 1 20,833 20,833 Machine # 1 79,167 79,167 2001-2002 31-01-2002 200,000 Machine # 1 79,167x25% = 19,792 Machine # 2 200,000x25%x5/ 12=20,833 Machine # 1 40,625 Machine # 2 20,833 61,458 Machine # 1 59,375 Machine # 2 179,167 238,542 2002-2003 Machine # 1 59,375x25% = 14,844 Machine # 2 179,167x25% =44,792 Machine # 1 55,469 Machine # 2 65,625 121,094 Machine # 1 44,531 Machine # 2 134,375 178,906 2003-2004   01-07-2003 50,000 Machine # 1 44,531x25%x 9/12= 8,350 Machine # 2 134,375x25% = 33,594 Machine # 3 50,000x25% = 12,500 Machine # 1 63,819 Machine # 2 99,219 Machine # 3 12,500 175,538 Machine # 1 (36,181) (sold) Machine # 2 100,781 Machine # 3 37,500 138,281

## Presentation in Balance Sheet

 Year Cost of Machinery Rs. Accumulated Depreciation Rs. Written Down Value Rs. 2000-2001 100,000 20,833 79,167 2001-2002 300,000 61,458 238,542 2002-2003 300,000 121,094 178,906

Written down Value of the year 2003-2004

Opening Written Down Value:

178,906
50,000
Less: Depreciation of Machine # 1 in 2003-2004:
(8,350)
Less: Depreciation of other assets:
(46,094)
Less: Written Down Value of machine disposed:
(36,181)
Closing Written Down Value:
138,281

### Full year depreciation in the year of purchase and no depreciation in the year of sale:

 Date Purchase of machine (Rs.) Depreciation (Rs.) Accumulated depreciation (Rs.) Total Accum. Dep. Written Down Value (Rs.) Total Written Down Value (Rs.) 01-09-2000 100,000 Machine # 1 100,000 x 25% =25,000 Machine # 1 25,000 25,000 Machine # 1 75,000 75,000 2001-2002 31-01-2002 200,000 Machine # 1 75,000x25% = 18,750 Machine # 2 200,000x25% =50,000 Machine # 1 43,750 Machine # 2 50,000 93,750 Machine # 1 56,250 Machine # 2 150,000 206,250 2002-2003 Machine # 1 56,250x25% = 14,063 Machine # 2 150,000x25% =37,500 Machine # 1 57,813 Machine # 2 87,500 145,313 Machine # 1 42,187 Machine # 2 112,500 154,687 2003-2004   01-07-2003 50,000 Machine # 1 0 Machine sold Machine # 2 112,500x25% = 28,125 Machine # 3 50,000x25% = 12,500 Machine # 1 57,813 (sold)Machine # 2 115,625 Machine # 3 12,500 185,935 Machine # 1 42,187 (sold) Machine # 2 84,375 Machine # 3 37,500 121,875

### Presentation in the Balance Sheet

 Year Cost of Machinery Rs. Accumulated Depreciation Rs. Written Down Value Rs. 2000-2001 100,000 25,000 75,000 2001-2002 300,000 93,750 206,250 2002-2003 300,000 145,313 154,687

Written down Value of the year 2003-2004

Opening Written Down Value:

Rs. 154,687
Rs. 50,000
Less: Depreciation of Machine # 1 in 2003-2004:
0
Less: Depreciation of other assets:
(40,625)
Less: Written Down Value of machine disposed:
(42,187)
Closing Written Down Value:
Rs. 121,875

## Illustration # 2

Following information of machinery account is available in Year 2004:
• Machine # 1 is purchased on August 1, 2000 for Rs. 50,000
• Machine # 2 is purchased on April 1, 2002 for Rs. 100,000
• Machine # 3 is purchased on March 1, 2004 for Rs. 150,000
• Machine # 1 is disposed on May 31, 2004
Depreciation is charged @ 20% reducing balance method. Financial year is closed on June 30 every year.

Show the calculation of depreciation on machinery for four years using the following policies:
• Depreciation is charged on the basis of use
• Full depreciation is charged in the year of purchase and no depreciation is charged in the year of disposal,

## Depreciation on the basis of use

 Date Purchase of machine (Rs.) Depreciation (Rs.) Accumulated depreciation (Rs.) Total Accum. Dep. Written Down Value (Rs.) Total Written Down Value (Rs.) 01-08-2000 50,000 Machine # 1 50,000 x 20% x11/12=9,167 Machine # 1 9,167 9,167 Machine # 1 9,167 40,833 2001-2002 01-04-2002 100,000 Machine # 1 40,833x20% = 8,167 Machine # 2 100,000x20%x3/ 12=5,000 Machine # 1 17,334 Machine # 2 5,000 22,334 Machine # 1 32,666 Machine # 2 95,000 127,666 2002-2003 Machine # 1 32,666x20% = 6,533 Machine # 2 95,000x20% =19,000 Machine # 1 23,867 Machine # 2 24,000 47,867 Machine # 1 26,133 Machine # 2 76,000 102,133 2003-2004   01-03-2004 150,000 Machine # 1 26,133x20%x 11/12= 4,791 Machine # 2 76,000x20% = 15,200 Machine # 3 150,000x20%x 4/12= 10,000 Machine # 1 28,658 Machine # 2 39,200 Machine # 3 10,000 77,858 Machine # 1 (21,342) (sold) Machine # 2 60,800 Machine # 3 140,000 200,800

### Presentation in the Balance Sheet

 Year Cost of Machinery Rs. Accumulated Depreciation Rs. Written Down Value Rs. 2000-2001 50,000 9,167 40,833 2001-2002 150,000 22,334 127,666 2002-2003 150,000 47,867 102,133

Written Down Value of the year 2003-2004

Opening Written Down Value:

Rs. 102,133
Rs. 150,000
Less: Depreciation of Machine # 1 in 2003-2004:
(4,791)
Less: Depreciation of other assets:
(25,200)
Less: Written Down Value of machine disposed:
(21,342)
Closing Written Down Value:
Rs. 200,800

### Full year depreciation in the year of purchase and no depreciation in the year of sale:

 Date Purchase of machine (Rs.) Depreciation (Rs.) Accumulated depreciation (Rs.) Total Accum. Dep. Written Down Value (Rs.) Total Written Down Value (Rs.) 01-08-2000 50,000 Machine # 1 50,000 x 20% =10,000 Machine # 1 10,000 10,000 Machine # 1 40,000 40,000 2001-2002 01-04-2002 100,000 Machine # 1 40,000x20% = 8,000 Machine # 2 100,000x20% =20,000 Machine # 1 18,000 Machine # 2 20,000 38,000 Machine # 1 32,000 Machine # 2 80,000 112,000 2002-2003 Machine # 1 32,000x20% = 6,400 Machine # 2 80,000x20% =16,000 Machine # 1 24,400 Machine # 2 36,000 60,400 Machine # 1 25,600 Machine # 2 64,000 89,600 2003-2004   01-03-2004 150,000 Machine # 1 0 Machine sold Machine # 2 64,000x20% = 12,800 Machine # 3 150,000x20% = 30,000 Machine # 1 24,400 (sold) Machine # 2 48,800 Machine # 3 30,000 103,200 Machine # 1 (25,600) (sold) Machine # 2 51,200 Machine # 3 120,000 171,200

### Presentation in the Balance Sheet

 Year Cost of Machinery Rs. Accumulated Depreciation Rs. Written Down Value Rs. 2000-2001 50,000 10,000 40,000 2001-2002 150,000 38,000 112,000 2002-2003 150,000 60,400 89,600

Written Down Value of the year 2003-2004

Opening Written Down Value:

Rs. 89,600
Rs. 150,000
Less: Depreciation of Machine # 1 in 2003-2004:
0
Less: Depreciation of other assets:
(42,800)
Less: Written Down Value of machine disposed: (
(25,600)
Closing Written Down Value:
Rs. 171,200

## Revaluation of Fixed Assets

Fixed assets are purchased to be used for longer period. In the subsequent years, the value of asset could be higher or lower than its present book value due to inflationary condition of the economy. Assets are valued at Historical Cost in the books of accounts. Historical Cost is the original cost of the asset at which it was purchased plus additional costs incurred on the asset to bring it in working condition. Sometimes, the management of the business, if it thinks fit, revalues the asset to present it on current market value. Once the asset is revalued to its market value, then its value has to be constantly monitored to reflect the changes in the market value.
If an asset is revalued at higher cost than its original cost, the excess amount will be treated as profit on revaluation of fixed assets and it is credited to Revaluation Reserve Account.
On the other hand, if an asset is revalued at lower cost than its original cost, the balance amount will be treated as loss on revaluation of fixed assets and it is shown in the profit & loss account of that year in which asset was revalued.