Question

N Ltd. purchase machine for Rs. $4,75,000$ on 1.1.2010 and spent Rs. $25,000$ on its installation. Rate of depreciation $10$% on SLM. Company charge depreciation on SLM up to year ended 31.12.2014. In year 2015 the company wants to change its method of depreciation from SLM to WDV w.e.f from 1.1.2010. To effect the change in method machinery account will be -

• A. Credited by Rs. $45,245$
• B. Debited by Rs. $45,245$
• C. Credited by Rs. $42,983$
• D. Debited by Rs. $42,983$

Answer 1

The correct option is B Debited by Rs. $45,245$

Depreciation as per Straight line method for the period 2010-2014:

Total cost of the asset: $Rs.4,75,000$+$Rs.25,000$=$Rs.5,00,000$

Therefore, depreciation for 5 years= $Rs.5,00,000$ X 10%= $Rs.50,000$ X 5= $Rs.2,50,000$

Depreciation as per Written Down Value method:

1st year: $Rs.5,00,000$ X 10%=$Rs.50,000$

2nd year:$5,00,000$-$Rs.50,000$=$Rs.4,50,000$ X 10%= $Rs.45,000$

3rd year:$Rs.4,50,000$-$Rs.45,000$=$Rs.4,05,000$ X 10%= $Rs.40,500$

4th year:$Rs.4,05,000$-$Rs.40,500$=$Rs.3,64,500$ X 10%= $Rs.36,450$

5th year: $Rs.3,64,500$-$Rs.36,450$=$Rs.3,28,050$ X 10%= $Rs.32,805$

Accumulated depreciation as per Written down value method:

$Rs.50,000$+$Rs.45,000$+$40,500$+$Rs.36,450$+$Rs.32,805$=$Rs.2,04,755$

In order to change the method of depreciation, it is required to be given a retrospective effect and hence the difference between depreciation calculated as per both the methods should be given effect in the Profit & Loss Account and the asset balance:

Depreciation as per straight line method: $Rs.2,50,000$

Depreciation as per written down value method: $Rs.2,04,755$

Therefore, amount deducted as per the earlier method is more than written value method, this needs to be reduced and hence added back (debited) to asset and credited to Profit & Loss Account.