Question 5
Machinery account with a part sale and a change from DBM to SLM
18.33 marks
- Time to write
- About 37 minutes
From an older CBCS paper
Question
Question 5 · 18.33 marksQ.5 Mr. B bought a machinery on 1st October 2016 for Rs. 5,40,000, spending Rs. 12,000 on freight and transit insurance. On 25th December 2016 he spent a further Rs.48,000 on erecting it. The machinery became ready for use on 1-1-2017. Then, on 1st July 2017, he bought another machinery for Rs. 1,20,000, and in the year 2018 spent Rs. 12,000 on repairing it.
On 1st July 2019, however, one part of the machinery on 1-10-2016, costing Rs. 2,40,000, was sold for Rs. 1,80,000. On 1-10-2019 he bought another machinery for Rs. 3,60,000.
On 1st July 2020, however, the machinery bought on 1st July 2017 was sold for Rs. 78,000. He charged depreciation @10% p.a. by DBM. In the year 2020 he decided to change his method of depreciation, and adopted the SLM, charging depreciation @ 10% p.a. Prepare the machinery A/c up to the year that ends on 31st December 2020. [18.33 Marks]
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
What the paper leaves open
- The calendar year is the accounting year.
- The repairs in 2018 are revenue expenditure.
- The change from DBM to SLM in 2020 is a change in estimate, applied from 2020 onwards on the written-down value, and the answer shows the retrospective treatment as the other reading.
- "A part of the machinery on 1-10-2016" is kept as printed (the machinery bought on that date).
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 Cost of Machine I and the start of depreciation 3 marks 5 min
- 2 Depreciation 2017-2019 and the part sale 6 marks 11 min
- 3 The 2020 change of method and the sale of Machine II 5 marks 9 min
- 4 Machinery Account 4.3 marks 8 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 37 minutes for 18.33 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Basis (paper note). Calendar years. Machine I is capitalised at its price plus the costs of bringing it to working condition: 5,40,000 + freight and transit insurance 12,000 + erection 48,000 = ₹6,00,000; depreciation starts on 1 January 2017, when it became ready for use. The 2018 repairs (₹12,000) are revenue expenditure. Depreciation is 10% on the diminishing balance to 2019. Under AS-10 the method reflects the pattern in which the asset's benefits are consumed, and it is reviewed at least at each year-end and changed if that pattern has changed significantly. The change to the straight line method in 2020 is therefore a change in accounting estimate, applied prospectively: from 2020 each machine is depreciated at 10% a year on its written-down value at 1 January 2020 (or on cost, for later purchases), with nothing restated. Depreciation is charged only for the part of a year an asset is held; on the part sold, the amount realised is credited to the machinery account and the balance written off.
| Year | Machine | Working | ₹ |
|---|---|---|---|
| 2017 | I | 10% × 6,00,000 | 60,000 |
| 2017 | II | 10% × 1,20,000 × 6/12 | 6,000 |
| 2018 | I | 10% × 5,40,000 | 54,000 |
| 2018 | II | 10% × 1,14,000 | 11,400 |
| 2019 | I, part sold (40%) | 10% × 1,94,400 × 6/12 | 9,720 |
| 2019 | I, part kept (60%) | 10% × 2,91,600 | 29,160 |
| 2019 | II | 10% × 1,02,600 | 10,260 |
| 2019 | III | 10% × 3,60,000 × 3/12 | 9,000 |
| 2020 | I, part kept | 10% × 2,62,440 (SLM on WDV) | 26,244 |
| 2020 | II (to 1 July) | 10% × 92,340 × 6/12 | 4,617 |
| 2020 | III | 10% × 3,51,000 (SLM on WDV) | 35,100 |
- Part sold on 1.7.2019: WDV at 1.1.2019 = 4,86,000 × 2,40,000/6,00,000 = 1,94,400; less 9,720 = 1,84,680; sold for 1,80,000: loss ₹4,680.
- Machine II sold on 1.7.2020: 92,340 − 4,617 = 87,723; sold for 78,000: loss ₹9,723.
| Year | Dr | ₹ | Cr | ₹ |
|---|---|---|---|---|
| 2016 | To Bank (Machine I) | 5,40,000 | By Balance c/d | 6,00,000 |
| To Bank (freight and insurance) | 12,000 | |||
| To Bank (erection) | 48,000 | |||
| 6,00,000 | 6,00,000 | |||
| 2017 | To Balance b/d | 6,00,000 | By Depreciation (60,000 + 6,000) | 66,000 |
| To Bank (Machine II) | 1,20,000 | By Balance c/d | 6,54,000 | |
| 7,20,000 | 7,20,000 | |||
| 2018 | To Balance b/d | 6,54,000 | By Depreciation (54,000 + 11,400) | 65,400 |
| By Balance c/d | 5,88,600 | |||
| 6,54,000 | 6,54,000 | |||
| 2019 | To Balance b/d | 5,88,600 | By Depreciation (part sold, to 1 July) | 9,720 |
| To Bank (Machine III) | 3,60,000 | By Bank (sale of part) | 1,80,000 | |
| By Profit and Loss (loss on sale) | 4,680 | |||
| By Depreciation (29,160 + 10,260 + 9,000) | 48,420 | |||
| By Balance c/d | 7,05,780 | |||
| 9,48,600 | 9,48,600 | |||
| 2020 | To Balance b/d | 7,05,780 | By Depreciation (Machine II, to 1 July) | 4,617 |
| By Bank (sale of Machine II) | 78,000 | |||
| By Profit and Loss (loss on sale) | 9,723 | |||
| By Depreciation (26,244 + 35,100) | 61,344 | |||
| By Balance c/d | 5,52,096 | |||
| 7,05,780 | 7,05,780 |
Closing balance = Machine I (part kept) 2,62,440 − 26,244 = 2,36,196 + Machine III 3,51,000 − 35,100 = 3,15,900.
The other reading (retrospective change, the withdrawn AS-6). Recomputing straight line at 10% of cost from the start gives arrears of ₹12,780 charged in 2020, 2020 depreciation of ₹78,000 (36,000 + 6,000 + 36,000), a loss of ₹6,000 on Machine II, and a closing balance of ₹5,31,000.
Where the 18.33 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Cost of Machine I and the start of depreciation | 3 |
| 2 | Depreciation 2017-2019 and the part sale | 6 |
| 3 | The 2020 change of method and the sale of Machine II | 5 |
| 4 | Machinery Account | 4.33 |
| Total | 18.33 |
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