Question 2 (a)
Machinery Account under AS 10, with a change of depreciation method
9 marks
- Time to write
- About 18 minutes
- Notes
- Crux notes
Question
Question 2 (a) · 9 marksKORAL Ltd. bought a machinery on 1st October,2019 for ₹5,40,000 and spent ₹12,000 on freight and transit insurance. On 25th December, 2019, it spent a further ₹48,000 on its erection. It was put to use on 1-1-2020. On 1st July, 2020, it bought another machine for ₹1,20,000. During the year 2021, it spent ₹12,000 on repairs on 1-4-2021. However, on 1-4-2022, a part of the machinery put to use on 1-1-2020, costing ₹2,40,000, was sold for ₹1,80,000. On 1-10-2022 it bought another machinery for ₹3,60,000. On 1-7-2023, however, the machinery bought on 1-7-2020 was sold for ₹78,000. The firm charged depreciation @10% p.a. by the straight line method. During the year 2023, KORAL Ltd. decided to change its method of providing depreciation and adopted the Diminishing balance method, charging depreciation @10% p.a. When the change was made, management felt no need to review the machine's useful life.
Prepare the Machinery Account under the provisions of AS 10 up to 31-12-2023.
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
- Prepare the Machinery AccountDraw the format first (heading, columns, dates), then fill in the figures from your working.
What the paper leaves open
- Accounts are read as closed on 31 December each year, since the account is asked for "up to 31-12-2023".
- The change to the diminishing balance method is dated only "during the year 2023"; we apply it from 1 January 2023 to the written-down value on that date, prospectively, as a change in accounting estimate (AS 10).
- The ₹12,000 spent on repairs on 1-4-2021 is a revenue expense, not part of the machinery's cost.
- The part sold on 1-4-2022, "costing ₹2,40,000", is read as ₹2,40,000 of the first machine's total cost of ₹6,00,000 (price, freight and transit insurance, and erection).
- Depreciation is charged for the part of a year an asset is in use.
Write it in this order
Workings as you go: each statement feeds the next.
- Read the data; tick every adjustment as you plan it 1 min
- 1 Capitalisation of freight, insurance and erection; no depreciation for 2019; repairs to revenue 2 marks 4 min
- 2 Straight line depreciation 2020–2022 with part-year charges 2 marks 4 min
- 3 Sale of part in 2022: depreciation, proceeds, loss 1 mark 2 min
- 4 Change of method as a change in estimate: WDV base on 1-1-2023 2 marks 3 min
- 5 2023: sale of second machine, diminishing balance depreciation, closing balance 2 marks 3 min
- Check: every adjustment used, both sides agree, dates in 1 min
Final answer
Check your own figures against these.
- Balance of the Machinery Account on on 31-12-2023
- ₹5,42,700
- Losses on sale
- ₹6,000
- 2022) and ₹7,500 (2023
- Repairs of
- ₹12,000 charged to Profit and Loss for 2021
Try it first. About 18 minutes for 9 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.
Treatment
- Cost of the first machine. Cost covers the purchase price and every cost directly attributable to bringing the asset to the location and condition needed for its intended use. Freight and transit insurance (₹12,000) and erection (₹48,000) are therefore capitalised: 5,40,000 + 12,000 + 48,000 = ₹6,00,000. No depreciation is charged for 2019, because the machine was first used on 1-1-2020.
- Repairs of ₹12,000 (1-4-2021) keep the machine working; they add nothing to its capacity, so they are a revenue expense charged to Profit and Loss and do not enter the Machinery Account.
- Part-year depreciation and sales. Depreciation runs to the date of sale, and the shortfall of sale proceeds below the written-down value goes to Profit and Loss, as in the DU text's machinery illustration.
- Change of method. AS-10 requires the depreciation method to be reviewed and, where the expected pattern of benefits has changed, treats a change of method as a change in an accounting estimate under AS 5. It is therefore applied from 1-1-2023 to the written-down values on that date, and earlier years are not recomputed. Management saw no need to revisit the useful life, so only the method changes; the rate stays 10%.
Machinery Account (in the books of KORAL Ltd.)
Year 2019
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2019 Oct 1 | To Bank A/c (purchase price) | 5,40,000 | 2019 Dec 31 | By Balance c/d | 6,00,000 |
| 2019 Oct 1 | To Bank A/c (freight and transit insurance) | 12,000 | |||
| 2019 Dec 25 | To Bank A/c (erection) | 48,000 | |||
| 6,00,000 | 6,00,000 |
Year 2020
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2020 Jan 1 | To Balance b/d | 6,00,000 | 2020 Dec 31 | By Depreciation A/c (WN1) | 66,000 |
| 2020 Jul 1 | To Bank A/c (second machine) | 1,20,000 | 2020 Dec 31 | By Balance c/d | 6,54,000 |
| 7,20,000 | 7,20,000 |
Year 2021
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2021 Jan 1 | To Balance b/d | 6,54,000 | 2021 Dec 31 | By Depreciation A/c (WN1) | 72,000 |
| 2021 Dec 31 | By Balance c/d | 5,82,000 | |||
| 6,54,000 | 6,54,000 |
Year 2022
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2022 Jan 1 | To Balance b/d | 5,82,000 | 2022 Apr 1 | By Depreciation A/c (part sold, 3 months, WN2) | 6,000 |
| 2022 Oct 1 | To Bank A/c (third machine) | 3,60,000 | 2022 Apr 1 | By Bank A/c (sale of part) | 1,80,000 |
| 2022 Apr 1 | By Profit & Loss A/c (loss on sale, WN2) | 6,000 | |||
| 2022 Dec 31 | By Depreciation A/c (WN1) | 57,000 | |||
| 2022 Dec 31 | By Balance c/d | 6,93,000 | |||
| 9,42,000 | 9,42,000 |
Year 2023 (diminishing balance method @10% from 1-1-2023)
| Date | Dr | ₹ | Date | Cr | ₹ |
|---|---|---|---|---|---|
| 2023 Jan 1 | To Balance b/d | 6,93,000 | 2023 Jul 1 | By Depreciation A/c (second machine, 6 months, WN4) | 4,500 |
| 2023 Jul 1 | By Bank A/c (sale of second machine) | 78,000 | |||
| 2023 Jul 1 | By Profit & Loss A/c (loss on sale, WN4) | 7,500 | |||
| 2023 Dec 31 | By Depreciation A/c (WN4) | 60,300 | |||
| 2023 Dec 31 | By Balance c/d | 5,42,700 | |||
| 6,93,000 | 6,93,000 |
Result: balance of the Machinery Account on 31-12-2023 ₹5,42,700; losses on sale ₹6,000 (2022) and ₹7,500 (2023); repairs of ₹12,000 charged to Profit and Loss for 2021.
Working notes
WN1Straight line depreciation @10% of cost, 2020 to 2022
- 2020: first machine 6,00,000 × 10% = 60,000; second machine 1,20,000 × 10% × 6/12 = 6,000; total 66,000.
- 2021: 60,000 + 12,000 = 72,000.
- 2022 (year end): first machine's remaining part (6,00,000 − 2,40,000) 3,60,000 × 10% = 36,000; second machine 12,000; third machine 3,60,000 × 10% × 3/12 = 9,000; total 57,000.
WN2Part sold on 1-4-2022:
cost 2,40,000; depreciation for 2020 and 2021 at 24,000 a year = 48,000, so written-down value on 1-1-2022 is 1,92,000. Depreciation for 3 months = 6,000, leaving 1,86,000. Sold for 1,80,000: loss ₹6,000.
WN3Written-down values on 1-1-2023 (base for the new method)
| Machine | Cost | Depreciation to 31-12-2022 | WDV on 1-1-2023 (₹) |
|---|---|---|---|
| First machine, remaining part | 3,60,000 | 3 years × 36,000 | 2,52,000 |
| Second machine | 1,20,000 | 2½ years × 12,000 | 90,000 |
| Third machine | 3,60,000 | 3 months, 9,000 | 3,51,000 |
| Total (= balance b/d) | 6,93,000 |
WN42023 at 10% diminishing balance
- Second machine, sold 1-7-2023: 90,000 × 10% × 6/12 = 4,500; WDV 85,500; sold for 78,000: loss ₹7,500.
- Year end: (2,52,000 + 3,51,000) × 10% = 6,03,000 × 10% = 60,300.
- Closing balance: 6,03,000 − 60,300 = ₹5,42,700.
Where the 9 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Capitalisation of freight, insurance and erection; no depreciation for 2019; repairs to revenue | 2 |
| 2 | Straight line depreciation 2020–2022 with part-year charges | 2 |
| 3 | Sale of part in 2022: depreciation, proceeds, loss | 1 |
| 4 | Change of method as a change in estimate: WDV base on 1-1-2023 | 2 |
| 5 | 2023: sale of second machine, diminishing balance depreciation, closing balance | 2 |
| Total | 9 |
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