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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
Add: Cost of machine purchased:
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
Add: Cost of machine purchased:
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,

Solution

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
Add: Cost of machine purchased:
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
Add: Cost of machine purchased:
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.

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