Question

Reliance Ltd. Purchased a second-hand machine for ₹ 56,000 on October 01, 2011 and spent ₹ 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for ₹ 6,000 at the end of its useful life of 15 years. Moreover, an estimated cost of ₹ 1,000 is expected to be incurred to recover the salvage value of ₹ 6,000. Prepare machine account and Provision for depreciation account for the first three years charging depreciation by fixed installment Method. Accounts are closed on March 31, every year.

Answer 1

Dr.	Books of Reliance Ltd. Machinery Account						Cr.
Date	Particulars	J.F.	Amount ₹	Date	Particulars	J.F.	Amount ₹
2011				2012
Oct.01	To Bank A/c		56,000
Oct.01	To Bank A/c (Overhaul and Installation Expenses)		28,000	Mar.31	By Balance c/d		84,000
			84,000				84,000
2012				2013
Apr.01	To Balance b/d		84,000
				Mar.31	By Balance c/d		84,000
			84,000				84,000
2013				2014
Apr.01	To Balance b/d		84,000
				Mar.31	By Balance c/d		84,000
			84,000				84,000

 

Dr.	Provision for Depreciation Account						Cr.
Date	Particulars	J.F.	Amount ₹	Date	Particulars	J.F.	Amount ₹
2021				2012
Mar.31	To Balance c/d		2,634	Mar.31	By Depreciation A/c		2,634
			2,634				2,634
2013				2012
Mar.31	To Balance c/d		7,901	Apr.01	By Balance b/d		2,634
				2013
				Mar.31	By Depreciation A/c		5,267
			7,901				7,901
2014				2013
Mar.31	To Balance c/d		13,168	Apr.01	By Balance b/d		7,901
				2014
				Mar.31	By Depreciation A/c		5,267
			13,168				13,168

Working Note:

1. Net Residual value = Sale value – Expenses incurred for the disposal of the Asset
   = ₹ 6,000 – ₹ 1,000
   = ₹ 5,000
2. Cost of asset = ₹ 56,000 + ₹ 28,000
   = ₹ 84,000
3. Yearly Depreciation = `("Cost of Asset" - "Estimated Residential Value")/"Estimated useful life of the Asset" `
   = `(₹ 84,000  − ₹5,000)/15`
   = `(₹ 79,000)/15`
   = ₹ 5,267