The book value of plant and machinery on 1st april 2012 was rs 200000. New machinery for rs 10000 was purchased on 1st Jan 2013 and for rs 20000 on 1st october 2013. On july, 2014 a machinery whose book value had been rs 30000 on 1st april 2012 sold for rs. 16000 and entire amount was credited to plant and machinery account depriciaton had been charged @20%p.a. on diminishing balance method should be charged with retrospective effect since 1st april , 2012?

Question

Answer

Calculation of Depreciation

On 1st April 2012, the book value of plant and machinery was Rs. 200,000.

Depreciation at 20% p.a. on diminishing balance method should be charged.

Depreciation for the year 2012-13 = 20% of Rs. 200,000 = Rs. 40,000

Depreciation for the year 2013-14 = 20% of (Rs. 200,000 - Rs. 40,000 + Rs. 10,000 + Rs. 20,000) = Rs. 30,400

Adjustment for sale of machinery

A machinery whose book value was Rs. 30,000 on 1st April 2012 was sold for Rs. 16,000 in July 2014.

The entire amount was credited to the plant and machinery account.

Depreciation on the machinery sold till July 2014 = 20% of Rs. 30,000 x (2 + 3/12) = Rs. 12,500

Therefore, the book value of the machinery sold on July 2014 = Rs. 30,000 - Rs. 12,500 = Rs. 17,500

The sale of machinery resulted in a loss of Rs. (16,000 - 17,500) = Rs. 1,500

Retrospective effect of depreciation

The retrospective effect of depreciation means charging the depreciation for the previous years as well to adjust the accounts properly.

Since the sale of machinery resulted in a loss, the plant and machinery account needs to be adjusted by debiting it with the loss amount of Rs. 1,500.

The adjustment for depreciation needs to be made for the previous years as well.

The revised book value of plant and machinery after the adjustment would be:

1st April 2012: Rs. 200,000 - Rs. 40,000 = Rs. 160,000

1st April 2013: Rs. 160,000 - Rs. 30,400 - Rs. 10,000 = Rs. 119,600

1st April 2014: Rs. 119,600 - Rs. 24,000 - Rs. 20,000 = Rs. 75,600

Hence, the adjustment for depreciation for the previous years would be:

For 2012-13: Rs. 40,000

For 2013-14: Rs. 30,400

The plant and machinery account needs to be debited with the above amounts and the profit and loss account needs to be credited.

Conclusion

The adjustment for depreciation needs to be made with retrospective effect since 1st April 2012.

The adjustment needs to be made for the previous years as well.

The plant and machinery account

Answer

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