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.

Solution

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		  

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