Question 2 (b)

Plant and Machinery Account under AS 10, with a change of method and life

12 marks

Time to write
About 24 minutes
Topic
Depreciation, PPE and AS 10
Notes
Crux notes

Question

Question 2 (b) · 12 marks

A Company's Plant and Machinery Account showed a debit balance of Rs. 1,76,868 on April 1, 2022. The company was incorporated in April 2019, and its practice has been to charge a full year's depreciation each year on the Diminishing Balance System @15% p.a.

However, on 1st April, 2022, it was decided that the method be changed, with prospective effect, from Diminishing Balance to Straight Line. At the same time, the management reviewed the machine's useful life and estimated that it would probably work for 7 more years, with a scrap value of Rs. 8,868.

On 1st April, 2022, a new machine was bought for Rs. 60,000; it is to be depreciated @10% p.a. on the straight line basis.

The other machines were all acquired in 2019-20.

Show the Plant and Machinery Account from 2019-20 to 2022-23 as per the provisions of AS-10.,

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

24 minfor 12 marks

Read from the question

  • Show the Plant and Machinery AccountDraw the format first (heading, columns, dates), then fill in the figures from your working.

What the paper leaves open

  1. The change of method and the review of useful life take effect from 1st April, 2022, prospectively, as changes in accounting estimates under AS 10.
  2. The old machines are depreciated on the straight line from their carrying amount at that date, less the scrap value, over the 7 remaining years.
  3. The account is shown for each year from 2019-20; the earlier years' figures are found from the carrying amount at 1st April, 2022.

Write it in this order

  1. Read the data; tick every adjustment as you plan it 2 min
  2. 1 Original cost found from the 1st April 2022 balance 3 marks 5 min
  3. 2 Diminishing balance depreciation for three years 3 marks 5 min
  4. 3 Change of method and life applied prospectively 4 marks 7 min
  5. 4 New machine and the 2022-23 account 2 marks 3 min
  6. Check: every adjustment used, both sides agree, dates in 2 min

Try it first. About 24 minutes for 12 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 of the answer

  1. Original cost. The machines were bought in 2019-20 and depreciated at 15% a year on the diminishing balance for three years, so the cost is 1,76,868 ÷ 0.85³ = ₹2,88,000.
  2. The change of method and the review of useful life on 1st April 2022 are changes in accounting estimates under AS 10, applied prospectively; the residual value and useful life are reviewed and any change is accounted for as a change in an accounting estimate. From that date the carrying amount less scrap is spread over the 7 remaining years on the straight line: (1,76,868 − 8,868) ÷ 7 = ₹24,000 a year. Nothing earlier is recomputed.
  3. The new machine (₹60,000) is depreciated at 10% a year on the straight line: ₹6,000.

Plant and Machinery Account

YearDr₹Cr₹
2019-20To Bank (machines bought)2,88,000By Depreciation (15%)43,200
By Balance c/d2,44,800
2,88,0002,88,000
2020-21To Balance b/d2,44,800By Depreciation (15%)36,720
By Balance c/d2,08,080
2,44,8002,44,800
2021-22To Balance b/d2,08,080By Depreciation (15%)31,212
By Balance c/d1,76,868
2,08,0802,08,080
2022-23To Balance b/d1,76,868By Depreciation (24,000 + 6,000)30,000
To Bank (new machine, 1.4.2022)60,000By Balance c/d2,06,868
2,36,8682,36,868

Where the 12 marks sit

#ComponentMarks
1Original cost found from the 1st April 2022 balance3
2Diminishing balance depreciation for three years3
3Change of method and life applied prospectively4
4New machine and the 2022-23 account2
Total12
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