Question 2 (a)

Machinery Account (method change + disposal)

8 marks

Time to write
About 16 minutes
Topic
Depreciation, PPE and AS 10
Notes
Crux notes

Question

Question 2 (a) · 8 marks

Vasant Traders depreciated its machinery at 10% per annum by the diminishing balance method and had ₹5,40,000 balance in its machinery account on April 1, 2023. During the year ended 31st March 2024 the machinery purchased on April 1, 2021, for ₹1,00,000 was sold for ₹50,000 on 1st October 2023 and a new machinery costing ₹90,000 was purchased and installed on the same date, the installation charges being ₹10,000.

The company changed its method of depreciation on 1-4-2023 from diminishing balances to the straight-line method, the rate of depreciation being 8% per annum.

Show the machinery account for the year that ended on 31st March 2024.

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

16 minfor 8 marks

Read from the question

  • Show the machinery accountDraw the format first (heading, columns, dates), then fill in the figures from your working.

What the paper leaves open

The paper dates the change of method "1-4-2023" (our version), the first day of the year, and does not say how the change is applied. It is applied from that date to the written-down values then standing: 8% straight line is charged on those values, for six months on the machine sold and on the new machine, and for the full year on the rest. The opening balance is a written-down value of unknown age, so the block cannot be recomputed retrospectively.

Write it in this order

Working notes first: they feed the statements.

  1. Read the data; tick every adjustment as you plan it 1 min
  2. 1 Depreciation after the change WN2 2 marks 4 min
  3. 2 Machinery Account foots 3 marks 5 min
  4. 3 WDV of the sold machine WN1 1 mark 2 min
  5. 4 Loss on sale WN3 2 marks 3 min
  6. Check: every adjustment used, both sides agree, dates in 1 min

Final answer

Check your own figures against these.

Depreciation
₹43,960
Loss on sale
₹27,760
Closing balance
₹5,18,280

Try it first. About 16 minutes for 8 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.

Machinery Account for the year ended 31 March 2024

Dr₹Cr₹
To Balance b/d5,40,000By Bank A/c (sale proceeds)50,000
To Bank A/c (new machine 90,000 + installation 10,000)1,00,000By Depreciation A/c (WN2)43,960
By Profit & Loss A/c (loss on sale, WN3)27,760
By Balance c/d5,18,280
6,40,0006,40,000
Dr₹
To Balance b/d5,40,000
To Bank A/c (new machine 90,000 + installation 10,000)1,00,000
6,40,000
Cr₹
By Bank A/c (sale proceeds)50,000
By Depreciation A/c (WN2)43,960
By Profit & Loss A/c (loss on sale, WN3)27,760
By Balance c/d5,18,280
6,40,000

Result: depreciation ₹43,960 · loss on sale ₹27,760 · closing balance ₹5,18,280.

Working notes

Working notes
  • WN1: WDV of the machine sold (bought 1-4-2021 @ ₹1,00,000, DBM 10%): 2021-22 dep 10,000 → 90,000; 2022-23 dep 9,000 → ₹81,000 at 1-4-2023. Rest of block = 5,40,000 − 81,000 = ₹4,59,000.
  • WN2: Depreciation 2023-24 (SLM @8% on WDV). The change is applied from 1 April 2023 on the written-down values (only the sold machine's original cost is known, so a retrospective recomputation of the whole block is not possible on this data: see note):
    • Machine sold (to date of sale): 8% × 81,000 × 6/12 = 3,240
    • Rest of block: 8% × 4,59,000 = 36,720
    • New machine: 8% × 1,00,000 × 6/12 = 4,000. Total ₹43,960.
  • WN3: Loss on sale. WDV at sale = 81,000 − 3,240 = ₹77,760; proceeds ₹50,000 → loss ₹27,760. The loss on derecognising the machine is included in the statement of profit and loss (AS-10 para 75).
  • Method basis. The DU text's worked machinery account adds the installation spend to the machine's cost, charges depreciation for the part of the year up to the date of disposal, and transfers the loss on disposal to the Profit & Loss Account. The figures above are this question's own; the passage supports the method, not these amounts.

Disclosed tension. The DU prescribed text states a change of method should be applied with retrospective effect; here the ₹5,40,000 opening balance is a written-down value of unknown age, so retrospective restatement of the block is arithmetically impossible and SLM @8% is charged on the WDV at the date of change. AS-10 (Revised) would in any case treat a method change prospectively; no local examiner key settles this.

Where the 8 marks sit

#ComponentMarks
1Machinery Account (foots)3
2WDV of the sold machine (WN1)1
3Depreciation after the change (WN2)2
4Loss on sale (WN3)2
Total8
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