X company purchased a machine on 1st baishakh 2075 for rs 50000.transp...
Details of the Machine:
- Purchase Cost: Rs 50,000
- Transportation Cost: Rs 5,000
- Installation Cost: Rs 5,000
- Scrap Value: Rs 10,000
- Estimated Life: 5 years
Straight Line Method of Depreciation:Under the straight-line method of depreciation, the cost of the asset is divided equally over its useful life. The formula to calculate annual depreciation is:
Depreciation = (Cost of Asset - Scrap Value) / Useful Life
In this case, the cost of the machine is the sum of the purchase cost, transportation cost, and installation cost.
Calculating Annual Depreciation:Cost of Machine = Purchase Cost + Transportation Cost + Installation Cost
= Rs 50,000 + Rs 5,000 + Rs 5,000
= Rs 60,000
Depreciation = (Cost of Machine - Scrap Value) / Useful Life
= (Rs 60,000 - Rs 10,000) / 5
= Rs 10,000 / 5
= Rs 2,000
Depreciation Expense for Each Year:
- Year 1: Rs 2,000
- Year 2: Rs 2,000
- Year 3: Rs 2,000
- Year 4: Rs 2,000
- Year 5: Rs 2,000
Accounting Entries:At the end of each year, the depreciation expense is recorded in the books of accounts. The journal entry to record the depreciation expense would be:
Depreciation Expense (Expense Account) Dr. Rs 2,000
Accumulated Depreciation (Contra Asset) Cr. Rs 2,000
The Accumulated Depreciation account is a contra asset account that is subtracted from the cost of the machine to calculate its net book value.
Net Book Value:The net book value of an asset is the original cost minus the accumulated depreciation. It represents the remaining value of the asset on the company's books.
Net Book Value = Cost of Machine - Accumulated Depreciation
At the end of each year, the net book value of the machine will be calculated by subtracting the accumulated depreciation from the cost of the machine.
Example Calculation:Year 1:
Net Book Value = Cost of Machine - Accumulated Depreciation
= Rs 60,000 - Rs 2,000
= Rs 58,000
Year 2:
Net Book Value = Rs 58,000 - Rs 2,000
= Rs 56,000
Year 3:
Net Book Value = Rs 56,000 - Rs 2,000
= Rs 54,000
Year 4:
Net Book Value = Rs 54,000 - Rs 2,000
= Rs 52,000
Year 5:
Net Book Value = Rs 52,000 - Rs 2,000
= Rs 50,000