Question

On July 1, 2010, Ashwani purchased a machine for Rs 2,00,000 on credit. Installation expenses Rs 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be Rs 20,000. Depreciation is to be charged on the straight-line basis. Show the journal entry for the year 2010 and prepare necessary ledger accounts for the first three years.

Answer 1

Journal Entries
$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt.(Dr)}& \text{Amt.(Dr)}\\ 2010& & & & \\ \text{Jul 1}& \text{Machinery A/c}\text{Dr}& & 2,25,000& \\ & \text{To Sundry Creditors A/c}& & & 2,00,000\\ & \text{To Bank A/c}& & & 25,000\\ & \text{(Machinery purchased for Rs 2,00,000 and}& & & \\ & \underset{–}{\text{instaliation charges of Rs 25,000 paid through cheque)}}& & & \\ \text{Dec 31}& \text{Depreciation A/c}\text{Dr}& & 20,500& \\ & \text{To Machinery A/c}& & & 20,500\\ & \text{(Depreciation charged on machinery for six}& & & \\ & \underset{–}{\text{months)}}& & & \\ \text{Dec 31}& \text{Profit and Loss A/c}\text{Dr}& & 20,500& \\ & \text{To Depreciation A/c}& & & 20,500\\ & \text{(Depreciation charged on machinery transferred}& & & \\ & \underset{–}{\text{to Profit and Loss Account)}}& & & \\ 2011& & & & \\ \text{Dec 31}& \text{Depreciation A/c}\text{Dr}& & 41,000& \\ & \text{To Machinery A/c}& & & 41,000\\ & \underset{–}{\text{(Depreciation charged on machinery)}}& & & \\ \text{Dec 31}& \text{Profit and Loss A/c}\text{Dr}& & 41,000& \\ & \text{To Depreciation A/c}& & & 41,000\\ & \text{(Depreciation charged on machinery transferred}& & & \\ & \underset{–}{\text{to Profit and Loss Account)}}& & & \\ 2012& & & & \\ \text{Dec 31}& \text{Depreciation A/c}\text{Dr}& & 41,000& \\ & \text{To Machinery A/c}& & & 41,000\\ & \underset{–}{\text{(Depreciation charged on Machinery)}}& & & \\ \text{Dec 31}& \text{Profit and Loss A/c}\text{Dr}& & 41,000& \\ & \text{To Depreciation A/c}& & & 41,000\\ & \text{(Depreciation charged on machinery transferred}& & & \\ & \text{to Profit and Loss Account)}& & & \end{array}$

Dr Machinery Account Cr
$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt.(Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt.(Rs)}\\ 2010& & & & 2010& & & \\ \text{Jul 1}& \text{Sundry}& & & \text{Dec 31}& \text{Depreciation}& & 20,500\\ & \text{Credirs A/c}& & 2,00,000& & \text{A/c}& & \\ \text{Jul 1}& \text{Bank A/c}& & 25,000& \text{Dec 31}& \text{Balance c/d}& & 2,04,500\\ & & & \underset{–}{\overline{2,25,000}}& & & & \underset{–}{\overline{2,25,000}}\\ 2011& & & & 2011& & & \\ \text{Jan 1}& \text{Balance b/d}& & 2,04,500& \text{Dec 31}& \text{Depreciation}& & \\ & & & & & \text{A/c}& & 41,000\\ & & & & \text{Dec 31}& \text{Balance c/d}& & 1,63,500\\ & & & \underset{–}{\overline{2,04,500}}& & & & \underset{–}{\overline{2,04,500}}\\ 2012& & & & 2012& & & \\ \text{Jan 1}& \text{Balance b/d}& & 1,63,500& \text{Dec 31}& \text{Depreciation}& & \\ & & & & & \text{A/c}& & 41,000\\ & & & & \text{Dec 31}& \text{Balance c/d}& & 1,22,500\\ & & & \underset{–}{\overline{1,63,500}}& & & & \underset{–}{\overline{1,63,500}}\end{array}$

Dr Depreciation Account Cr
$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt.(Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt.(Rs)}\\ 2010& & & & 2010& & & \\ \text{Dec 31}& \text{Machinery A/c}& & 20,500& \text{Dec 31}& \text{Profit}\&\text{Loss}& & \\ & & & & & \text{A/c}& & 20,500\\ & & & \underset{–}{\overline{20,500}}& & & & \underset{–}{\overline{20,500}}\\ 2011& & & & 2011& & & \\ \text{Dec 31}& \text{Machinery A/c}& & 41,000& \text{Dec 31}& \text{Profit}\&\text{Loss}& & \\ & & & & & \text{A/c}& & 41,000\\ & & & \underset{–}{\overline{41,000}}& & & & \underset{–}{\overline{41,000}}\\ 2012& & & & 2012& & & \\ \text{Dec 31}& \text{Machinery A/c}& & 41,000& \text{Dec 31}& \text{Profit}\&\text{Loss}& & \\ & & & & & \text{A/c}& & 41,000\\ & & & \underset{–}{\overline{41,000}}& & & & \underset{–}{\overline{41,000}}\end{array}$

Working Note

Computation of Depreciation to be charged Annually

Depreciation = $\left[\frac{\text{Cost of Machine - Scrap}}{\text{No of years (Effective Life)}}\right]$

$=\frac{2,25,000-20,000}{5}$ = Rs. 41,000