Question

An asset is purchased on 1.1.2016 for ₹ 50,000. Depreciation is to be provided annually according to the straight-line method. The useful life of the asset is 10 years and its residual value is ₹ 10,000. Accounts are closed on 31st December every year. You are required to find out the rate of depreciation and give journal entries for first two years.

Answer 1

Original cost = ₹ 50,000

Residual value = ₹ 10,000

Estimated life = 10 years

Amount of depreciation = `("Original cost" - "Scrap value")/"Estimates life"`

`= (50,000 - 10,000)/10`

`= (40,000)/10`

= ₹ 4,000

Rate of depreciation = `"Amount of depreciation"/"Original cost" xx 100`

`= (4,000)/(50,000) xx 100`

= 8%

Journal entry

Date	Particulars	J.F.	Debit ₹	Credit ₹
1.1.2016	Machinery A/c  Dr.   To Bank A/c (Machinery bought)		50,000	50,000
31.12.2016	Depreciation A/c  Dr.   To Machinery A/c (Depreciation provided)		4,000	4,000
31.12.2016	Profit and loss A/c  Dr.   To Depreciation A/c (Depreciation transferred to profit and loss A/c)		4,000	4,000
31.12.2017	Depreciation A/c  Dr.   To Machinery A/c (Depreciation provided)		4,000	4,000
31.12.2017	Profit and loss A/c  Dr.   To Depreciation A/c (Depreciation transferred to profit and loss A/c)		4,000	4,000