# MGT101 - Financial Accounting - I - Lecture Handout 19

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# METHODS OF CHARGING DEPRECIATION (Continued)

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

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

## Illustration # 1

A machine is purchased for Rs. 400,000. Its useful life is estimated to be five years. Its residual value is Rs. 25,000. After four years, it was sold for Rs. 40,000. For the purpose of WDV, its depreciation rate is 40%.
You are required to show calculation of depreciation for four years. Also calculate profit or loss on disposal.

## Solution

### Calculation of depreciation and profit & loss on the basis of straight line method:

Depreciation/year = (400,000 – 25,000)/5 = 75,000 (Straight line method)

As, machine was sold after four years but its useful life was estimated for five years, when we calculate depreciation of the asset under straight line method, we will divide its WDV over five years, not on four

 Particulars Depreciation (Rs) Written Down Value (Rs.) Depreciable cost Dep. Of the 1st year Dep. Of the 2nd year Dep. Of the 3rd year Dep. Of the 4th year (75,000) (75,000) (75,000) (75,000) 375,000 300,000 225,000 150,000 75,000

Book value after four years

Rs. 75,000
Sale price
Rs. 40,000
Profit/(loss) on sale
Rs. (35,000) i-e.(40,000 – 75,000)

### Calculation of depreciation and profit & loss on the basis of reducing balance method:

Depreciation rate = 40%

 Particulars Depreciation (Rs) Accumulated Depreciation (Rs.) Written Down Value (Rs.) Depreciable cost 400,000 Dep. Of the 1st year 400,000 x 40% 160,000 160,000 240,000 Dep. Of the 2nd year 240,000 x 40% 96,000 256,000 144,000 Dep. Of the 3rd year 144,000 x 40% 57,600 313,600 86,400 Dep. Of the 4th year 86,400 x 40% 34,560 348,160 51,840

Book value after four years

Rs. 51,840
Sale price
Rs. 40,000
Profit/ (loss) on sale
Rs. (11,840) i-e. (40,000 – 51,840)

## Illustration # 2

Following information of machinery account is available in Year 2004:
• Machine # 1 is purchased on September 1, 2000 for Rs. 100,000
• Machine # 2 is purchased on January 31, 2002 for Rs. 200,000
• Machine # 3 is purchased on July 1, 2003 for Rs. 50,000
• Machine # 1 is disposed on March 31, 2004
Depreciation is charged @ 25% 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.) Accumulate d depreciatio n (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 200,000 Machine # 1 79,167x25% = 19,792 Machine # 1 40,625 61,458 Machine # 1 59,375 238,542 31-01-2002 Machine # 2 200,000x25%x5/1 2=20,833 Machine # 2 20,833 Machine # 2 179,167 2002-2003 Machine # 1 59,375x25% = 14,844 Machine # 1 55,469 121,094 Machine # 1 44,531 178,906 Machine # 2 179,167x25% =44,792 Machine # 2 65,625 Machine # 2 134,375 2003-2004 Machine # 1 44,531x25%x 9/12= 8,350 Machine # 1 63,819 175,538 Machine # 1 (36,181) (sold) 138,281 Machine # 2 134,375x25% = 33,594 Machine # 2 99,219 Machine # 2 100,781 01-07-2003 50,000 Machine # 3 50,000x25% = 12,500 Machine # 3 12,500 Machine # 3 37,500

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

 Date Purchase of machine (Rs.) Depreciation (Rs.) Accumulate d depreciatio n (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 200,000 Machine # 1 75,000x25% = 18,750 Machine # 1 43,750 93,750 Machine # 1 56,250 206,250 31-01-2002 Machine # 2 200,000x25% =50,000 Machine # 2 50,000 Machine # 2 150,000 2002-2003 Machine # 1 56,250x25% = 14,063 Machine # 1 57,813 145,313 Machine # 1 42,187 154,687 Machine # 2 150,000x25% =37,500 Machine # 2 87,500 Machine # 2 112,500 2003-2004 Machine # 1 0 Machine sold Machine # 1 57,813 (sold) 185,935 Machine # 1 42,187 (sold) 121,875 Machine # 2 112,500x25% = 28,125 Machine # 2 115,625 Machine # 2 84,375 01-07-2003 50,000 Machine # 3 50,000x25% = 12,500 Machine # 3 12,500 Machine # 3 37,500