A limited had purchased a machinery for rupees 100000 on April 1 2017 ...
Introduction:
In this scenario, a company has purchased machinery for Rs. 100,000 on April 1, 2017. The useful life of the machinery is five years. On April 1, 2019, the asset's advisory value is assessed to be Rs. 150,000. In the financial year 2019-20, the company needs to prepare relevant accounts and maintain a separate provision for depreciation account.
Relevant Accounts:
1. Asset Account: The asset account represents the initial cost of the machinery. It will be recorded at Rs. 100,000 on April 1, 2017.
2. Provision for Depreciation Account: This account is maintained separately to record the depreciation charged on the asset. The provision for depreciation account is created to gradually reduce the value of the asset over its useful life.
Depreciation Calculation:
Depreciation is the systematic allocation of the cost of an asset over its useful life. In this case, the machinery has a useful life of five years. To calculate the annual depreciation expense, we can use the straight-line method.
Straight-line depreciation = (Cost of asset - Residual value) / Useful life
In this case, the cost of the machinery is Rs. 100,000 and the residual value is Rs. 150,000. The useful life is five years.
Depreciation expense per year = (Rs. 100,000 - Rs. 150,000) / 5 = Rs. -10,000 per year
Accounting Treatment:
1. Financial Year 2019-20:
- Asset Account:
- Opening balance on April 1, 2019: Rs. 100,000
- Depreciation charged: Rs. 10,000 (deducted from the asset account)
- Closing balance on March 31, 2020: Rs. 90,000 (Rs. 100,000 - Rs. 10,000)
- Provision for Depreciation Account:
- Opening balance on April 1, 2019: Rs. 0
- Depreciation charged: Rs. 10,000 (credited to the provision for depreciation account)
- Closing balance on March 31, 2020: Rs. 10,000
Summary:
In summary, for the financial year 2019-20, the asset account will have a closing balance of Rs. 90,000 and the provision for depreciation account will have a closing balance of Rs. 10,000. This reflects the depreciation charged on the machinery and the gradual reduction in its value over its useful life. The company follows the straight-line method to calculate depreciation.
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