Calculation of Depreciation:

To calculate the depreciation using the fixed installment method, we need to compute the annual depreciation amount first. The formula to calculate the annual depreciation is:

Annual Depreciation = (Cost of Machinery - Breakup Value) / Estimated Effective Life

Given:
Cost of Machinery = ₹ 40,000
Erection Expenses = ₹ 4,000
Breakup Value = ₹ 3,000
Estimated Effective Life = 10 years

Using the above formula, we can calculate the annual depreciation as follows:

Annual Depreciation = (₹ 40,000 + ₹ 4,000 - ₹ 3,000) / 10
Annual Depreciation = ₹ 41,000 / 10
Annual Depreciation = ₹ 4,100

Preparation of Machinery Account:

To prepare the machinery account, we will record the cost of machinery, erection expenses, and depreciation for each year. The machinery account will have the following format:

Machinery Account
------------------------------------------------------
Date | Particulars | Amount | Date | Particulars | Amount
------------------------------------------------------
2010 | To Bank A/c | 40,000 | | |
| To Erection Expenses A/c | 4,000 | | |
| To Depreciation A/c | 4,100 | | |
------------------------------------------------------
| | 48,100 | | |

2011 | To Depreciation A/c | 4,100 | | |
------------------------------------------------------
| | 4,100 | | |

2012 | To Depreciation A/c | 4,100 | | |
------------------------------------------------------
| | 4,100 | | |

2013 | To Depreciation A/c | 4,100 | | |
------------------------------------------------------
| | 4,100 | | |

2014 | To Depreciation A/c | 4,100 | | |
------------------------------------------------------
| | 4,100 | | |

2015 | To Depreciation A/c | 4,100 | | |
------------------------------------------------------
| | 4,100 | | |

2016 | To Breakup Value A/c | 3,000 | | |
------------------------------------------------------
| | 3,000 | | |

2016 | By Machinery A/c | 48,100 | | |
------------------------------------------------------
| | 48,100 | | |

Explanation:

- In the year 2010, the machinery was purchased for ₹ 40,000 and ₹ 4,000 was spent on its erection. Hence, the total cost of machinery in the year 2010 is ₹ 44,000.
- The depreciation for the year 2010 is calculated as ₹ 4,100 using the formula mentioned above.
- In the subsequent years, the depreciation amount of ₹ 4,100 is charged to the machinery account.
- After 5 years, in the year 2016, the machinery's value is reduced to its breakup value of ₹ 3,000.
- Finally, the machinery account is closed by transferring the total amount to the breakup value account.

Deprication of one year 700
and five years 700/5=3500