Question

On 1st April, 2015, Shivam Enterprise purchased a second-hand machinery for ₹ 52,000 and spent ₹ 2,000 on cartage, ₹ 3,000 on unloading, ₹ 2,000 on installation and ₹ 1,000 as brokerage of the middle man. It was estimated that the machinery will have a scrap value of ₹ 6,000 at the end of its useful life, which is 10 years. On 31st December 2015, repairs and renewals amounted to ₹ 2,500 were paid. On 1st October, 2017, this machine was sold for ₹ 30,600 and an amount of ₹ 600 was paid as commission to an agent. Calculate the amount of annual depreciation and rate of depreciation. Also prepare the Machinery Account for first 3 years, assuming that firm follows financial year for accounting.

Answer 1

$\begin{array}{l}\text{Amount of Depreciation}=\frac{\text{Cost of Machine}-\text{Scrap Value of Machine}}{\text{Life in Years}}\\ \text{=}\frac{60,000\left(\mathrm{Note}\right)-6,000}{10}=\text{Rs 5,400}\\ \text{Rate of Depreciation}=\frac{\text{Amount of Depreciation}}{\text{Cost of Machine}}\times 100\\ \text{=}\frac{5,400}{60,000}\times 100=9\%\text{p.a.}\\ \end{array}$

Machinery Account
Dr.				Cr.
Date	Particulars	Amount (Rs)	Date		Particulars	Amount (Rs)
2015			2016
Apr. 01	Bank A/c	60,000	Mar. 31		Depreciation A/c	5,400
			Mar. 31		Balance c/d	54,600
		60,000				60,000
2016			2017
Apr. 01	Balance b/d	54,600	Mar. 31		Depreciation A/c	5,400
			Mar. 31		Balance c/d	49,200
		54,600				54,600
2017			2017
Apr. 01	Balance b/d	49,200	Oct. 01		Depreciation A/c (for 6 months)	2,700
					Bank A/c (Sale)	30,000
					Profit and Loss A/c (Loss on Sale)	16,500
		49,200				49,200

Working Notes: Calculation of Profit or Loss on Sale

Particulars	Amount
Value of Machine as on Apr. 01, 2017	49,200
Less: Depreciation for 6 months	2,700
Value of M1 as on Oct. 01, 2017	46,500
Less: Sale Value	30,000
Loss on Sale	16,500

Note:

1. All the expenses incurred up to the date at which machine is put in use will be added to cost of machine.
2. The amount spent on repairs is a recurring nature expenses. So, it will not be added to Machine A/c.
3. Cost of Machine = 52,000 + 2,000 + 3,000 + 2,000 + 1,000 = Rs 60,000