Question 2 (a)
Plant, Accumulated Depreciation and Disposal Accounts (change of method)
12 marks
- Time to write
- About 24 minutes
- Notes
- Crux notes
Question
Question 2 (a) · 12 marksOn 1st January 2019, a new plant was purchased by Ms. Kavita Rao for ₹ 3,00,000 and a further sum of ₹ 20,000 was spent on its installation. On 1st July 2020, a new plant was purchased for ₹ 1,60,000.
On 15th September, 2021, the first plant was destroyed by fire and only ₹ 8,000 was realized by selling the scrap, it not being insured.
On 7th September 2021, a second-hand plant was purchased for ₹ 1,00,000 and a further sum of ₹ 12,000 was spent on its repairs and ₹ 8,000 on its erection. It came into use on 15th October, 2021. Depteciation has been provided at the rate of 12% p.a. on the original cost, annually on 31st December. The practice was to charge a full year's depreciation on all acquisitions made during the year, and to ignore any depreciation on the item sold in the year. The accounts are closed each year on 31st December. In December 2021, because of the change in the statute it was decided to change the method of depreciation for the existing items of plant, following the rate of 20% p.a. on diminishing balance method, to best reflect the asset's consumption pattern.
For 3 years, show the Plant A/c, the Accumulated Depreciation A/c and the Plant Disposal A/c.
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
Read from the question
- ignore any depreciation on the item…The paper fixes this: use it as given, and say so in your answer.
What the paper leaves open
- The rule ignores depreciation on an item "sold during the year". The first plant was destroyed and its scrap sold, so it is read as leaving the books by sale, and no depreciation is charged on it in the year of the fire.
- The money "spent on its repairs" for the second-hand plant is read as part of bringing it into working condition (it came into use only after the repairs and erection), so it is capitalised. Read as a running repair, the ₹12,000 would go to Profit & Loss and that plant's cost and depreciation would fall.
- The paper does not say how the change of method is applied. The answer applies it prospectively from 2021 under AS 10 and also shows the retrospective treatment of the withdrawn AS 6 that older texts use. "Depteciation" is printed so.
Write it in this order
Working notes first: they feed the statements.
- Read the data; note exactly what is asked 2 min
- 1 Depreciation workings and the change of method WN1 2 marks 3 min
- 2 Cost of plants A and C installation; repairs and erection capitalised 1 mark 2 min
- 3 Plant Account, three years 3 marks 5 min
- 4 Accumulated Depreciation Account, with the change of method from 2021 4 marks 7 min
- 5 Plant Disposal Account 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Final answer
Check your own figures against these.
- Depreciation
- 2019 ₹38,400, 2020 ₹57,600, 2021 ₹52,160
- Loss by fire
- ₹2,35,200
- Closing Plant
- ₹2,80,000 less Accumulated Depreciation ₹71,360
Try it first. About 24 minutes for 12 marks. Write it out, then open the solution and check your figures against the final answer.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Approach
- Cost of each plant. Cost includes everything directly attributable to bringing the asset to the location and condition needed for it to operate, installation and assembly among them. So A = 3,00,000 + 20,000 = ₹3,20,000; C = 1,00,000 + 12,000 (repairs to make the second-hand plant usable) + 8,000 (erection) = ₹1,20,000.
- Accumulated depreciation in its own account. The asset stays at original cost; depreciation is credited to a provision (accumulated depreciation) account, and when an asset is discarded its accumulated depreciation is transferred out.
- The change of method: AS-10, from 2021, nothing restated. AS-10 requires the depreciation method to be reviewed, and where the expected pattern of consumption of the asset's benefits has changed significantly, the method is changed to reflect it; the change is accounted for as a change in an accounting estimate under AS 5. A change in estimate affects the current and later years only. So the existing plants B and C are depreciated at 20% on the diminishing balance from 2021: B on its written-down value of 1,40,800 at the start of 2021, and C on its cost. Earlier years are not recomputed and there is no deficiency. Plant A, destroyed in 2021, is outside the change.
Working notes
WN1Depreciation, year by year
| Year | Plant | Basis | ₹ |
|---|---|---|---|
| 2019 | A | 3,20,000 × 12% | 38,400 |
| 2020 | A | 3,20,000 × 12% | 38,400 |
| 2020 | B | 1,60,000 × 12% (full year, bought 1 July) | 19,200 |
| 2021 | A | nil: destroyed during the year | — |
| 2021 | B | (1,60,000 − 19,200) × 20% on the diminishing balance | 28,160 |
| 2021 | C | 1,20,000 × 20% (full year) | 24,000 |
Plant Account (foots ✓)
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2019 Jan 1 | To Bank: plant A (incl. installation) | 3,20,000 | 2019 Dec 31 | By Balance c/d | 3,20,000 |
| 2020 Jan 1 | To Balance b/d | 3,20,000 | 2020 Dec 31 | By Balance c/d | 4,80,000 |
| 2020 Jul 1 | To Bank: plant B | 1,60,000 | |||
| 4,80,000 | 4,80,000 | ||||
| 2021 Jan 1 | To Balance b/d | 4,80,000 | 2021 Sep 15 | By Plant Disposal A/c: plant A | 3,20,000 |
| 2021 Sep 7 | To Bank: plant C (price, repairs, erection) | 1,20,000 | 2021 Dec 31 | By Balance c/d | 2,80,000 |
| 6,00,000 | 6,00,000 |
Accumulated Depreciation Account (foots ✓)
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2019 Dec 31 | To Balance c/d | 38,400 | 2019 Dec 31 | By Depreciation A/c | 38,400 |
| 2020 Dec 31 | To Balance c/d | 96,000 | 2020 Jan 1 | By Balance b/d | 38,400 |
| 2020 Dec 31 | By Depreciation A/c (A 38,400 + B 19,200) | 57,600 | |||
| 96,000 | 96,000 | ||||
| 2021 Sep 15 | To Plant Disposal A/c (A, 2019 and 2020) | 76,800 | 2021 Jan 1 | By Balance b/d | 96,000 |
| 2021 Dec 31 | To Balance c/d (B 47,360 + C 24,000) | 71,360 | 2021 Dec 31 | By Depreciation A/c (B 28,160 + C 24,000) | 52,160 |
| 1,48,160 | 1,48,160 |
Plant Disposal Account (foots ✓)
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2021 Sep 15 | To Plant A/c: plant A | 3,20,000 | 2021 Sep 15 | By Accumulated Depreciation A/c | 76,800 |
| 2021 Sep 15 | By Bank: scrap realised | 8,000 | |||
| 2021 Dec 31 | By Profit & Loss A/c: loss by fire (uninsured) | 2,35,200 | |||
| 3,20,000 | 3,20,000 |
Proof. At 31 December 2021 the book value of the existing plants is 2,80,000 − 71,360 = ₹2,08,640: B 1,40,800 × 0.8 = 1,12,640 and C 1,20,000 × 0.8 = 96,000.
Result: depreciation 2019 ₹38,400, 2020 ₹57,600, 2021 ₹52,160 · loss by fire ₹2,35,200 · closing Plant ₹2,80,000 less Accumulated Depreciation ₹71,360.
Older textbooks: the withdrawn AS-6 (retrospective)
The old AS-6, now withdrawn, applied a change of method required by statute retrospectively: each existing plant was recomputed on the new method from the day it was first used, and the shortfall in past depreciation was charged to Profit & Loss in the year of change. Textbooks written for AS-6, including the DU reference text, still teach it. On that basis B's 2020 depreciation would have been 1,60,000 × 20% = 32,000 against 19,200 charged, a deficiency of ₹12,800, and B's 2021 charge would be (1,60,000 − 32,000) × 20% = 25,600.
| Figure | This answer (AS-10) | Withdrawn AS-6 (retrospective) |
|---|---|---|
| B's 2021 charge | 28,160 | 25,600 |
| C's 2021 charge | 24,000 | 24,000 |
| Deficiency charged to P&L in 2021 | — | 12,800 |
| Total 2021 charge to P&L for depreciation | 52,160 | 62,400 |
| Accumulated depreciation at 31 December 2021 | 71,360 | 81,600 |
| Book value of B and C at 31 December 2021 | 2,08,640 | 1,98,400 |
The Plant Account, the Disposal Account and the loss by fire (₹2,35,200) are the same under both.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Cost of plants A and C (installation; repairs and erection capitalised) | 1 |
| 2 | Plant Account, three years | 3 |
| 3 | Accumulated Depreciation Account, with the change of method from 2021 | 4 |
| 4 | Plant Disposal Account (loss by fire ₹2,35,200) | 2 |
| 5 | Depreciation workings and the change of method (WN1) | 2 |
| Total | 12 |
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