ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

Fundamentals of Accounting for CA CPT

CA Foundation : ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

The document ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev is a part of the CA Foundation Course Fundamentals of Accounting for CA CPT.
All you need of CA Foundation at this link: CA Foundation

3.6 MACHINE HOUR METHOD

Where it is practicable to keep a record of the actual running hours of each machine, depreciation may be calculated on the basis of hours that the concerned machine worked. The machine hour rate of the depreciation, is calculated after estimating the total number of hours that machine would work during its whole life; however, it may have to be varied from time to time, on a consideration of the changes in the economic and technological conditions which might take place, to ensure that the amount provided for depreciation corresponds to that considered appropriate in the changed circumstances. It would be observed that the method is only a slight variation of the Straight Line Method under which depreciation is calculated per year. Under this method it is calculated for each hour the machine works.

 

Illustration 7

A machine was purchased for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 3,00,000 having an estimated total working of 24,000 hours. The scrap value is expected to be ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev20,000 and anticipated pattern of distribution of effective hours is as follows :

Year 
1 - 33,000 hours per year
4 - 62,600 hours per year
7 - 10 1,800 hours per year

Determine Annual Depreciation under Machine Hour Rate Method.

Solution 

Statement of Annual Depreciation under Machine Hours Rate Method

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev
ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev


3.7 PRODUCTION UNITS METHOD

Under this method depreciation of the asset is determined by comparing the annual production with the estimated total production. The amount of depreciation is computed by the use of following method :

Depreciation for the period = Depreciable Amount ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

The method is applicable to machines producing product of uniform specifications.

 

Illustration 8 

A machine is purchased for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev2,00,000. Its estimated useful life is 10 years with a residual value of ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev20,000. The machine is expected to produce 1.5 lakh units during its life time. Expected distribution pattern of production is as follows:

YearProduction
1-320,000 units per year
4-715,000 units per year
8-1010,000 units per year

Determine the value of depreciation for each year using production units method.

Solution 

Statement showing Depreciation under Production Units Method

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

 

3.8 DEPLETION METHOD

This method is used in case of mines, quarries etc. containing only a certain quantity of product. The depreciation rate is calculated by dividing the cost of the asset by the estimated quantity of product likely to be available. Annual depreciation will be the quantity extracted multiplied by the rate per unit.


Illustration 9 

M/s Jay & Co. took lease of a quarry on 1-1-2009 for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev1,00,00,000. As per technical estimate the total quantity of mineral deposit is 2,00,000 tonnes. Depreciation was charged on the basis of depletion method. Extraction pattern is given in the following table:

YearQuantity of Mineral extracted
2009   2,000 tonnes
201010,000 tonnes
201115,000 tonnes

Show the Quarry Lease Account and Depreciation Account for each year from 2009 to 2011.
Solution

Quarry Lease Account

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

Depreciation Account

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

 

4.  PROFIT OR LOSS ON THE SALE / DISPOSAL OF DEPRECIABLE ASSETS

Whenever any depreciable asset is sold during the year, depreciation is charged on it for the period it has been used in the sale year. The written down value after charging such depreciation is used for calculating the profit or loss on the sale of that asset. The resulting profit or loss on sale of the asset is ultimately transferred to profit and loss account.
For example: The book value of the asset as on 1st January, 2011 is ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 50,000. Depreciation is charged on the asset @10%. On 1st July 2011, the asset is sold for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 32,000. In such a situation, profit or loss on the sale will be calculated as follows:

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

 

Illustration 10

A firm purchased on 1st January, 2010 certain machinery for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev58,200 and spent ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev1,800 on its erection. On July 1, 2010 another machinery for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 20,000 was acquired. On 1st July, 2011 the machinery purchased on 1st January, 2010 having become obsolete was auctioned for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev38,600 and on the same date fresh machinery was purchased at a cost of ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev40,000. Depreciation was provided for annually on 31st December at the rate of 10 per cent p.a. on written down value. Prepare machinery account.

Solution
 Machinery Account

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

Working Note:
 Book Value of Machines

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

 

Illustration 11 

A company’s plant and machinery account at 31st December, 2011 and the corresponding depreciation provision account, broken down by year of purchase are as follows:

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

Depreciation is at the rate of 10% per annum on cost. It is the Company’s policy to assume that all purchases, sales or disposal of plant occurred on 30th June in the relevant year for the purpose of calculating depreciation, irrespective of the precise date on which these events occurred.
During 2012 the following transactions took place:

1. Purchase of plant and machinery amounted to ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 1,50,000

2. Plant that had been bought in 2001 for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 17,000 was scrapped.

3. Plant that had been bought in 2002 for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 9,000 was sold for 500.

4. Plant that had been bought in 2003 for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 24,000 was sold for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 1,500.

You are required to:

Calculate the provision for depreciation of plant and machinery for the year ended 31st December, 2012. In calculating this provision you should bear in mind that it is the company’s policy to show any profit or loss on the sale or disposal of plant as a completely separate item in the Profit and Loss Account.

 

Solution 

Calculation of provision for depreciation of plant and machinery for the year ended 31st December, 2012.

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev


Illustration 12

Prepare the following ledger accounts during 2012 from the information given in illustration 11 :

(i) plant and machinery at cost ;
(ii) depreciation provision;
(iii) sales or disposal of plant and machinery.

Solution 

(i) Plant and Machinery Account (for 2012) at Cost

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

(ii) Depreciation Provision Account (for 2012)

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

(iii) Sale or disposal of Plant and Machinery Account (for 2012)

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev


Illustration 13

The Machinery Account of a Factory showed a balance of ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev1,90,000 on 1st January, 2012. Its accounts were made up on 31st December each year and depreciation is written off at 10% p.a. under the Diminishing Balance Method.

On 1st June 2012, a new machinery was acquired at a cost of ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev 28,000 and installation charges incurred in erecting the machine works out to ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev892 on the same date. On 1st June, 2012 a machine which had cost ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev4,374 on 1st January 2010 was sold for ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev750. Another machine which had cost ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev437 on 1st January, 2011 was scrapped on the same date and it realised nothing.

Write a plant and machinery account for the year 2012, allowing the same rate of depreciation as in the past calculating depreciation to the nearest multiple of a Rupee. 

Solution
 Plant and Machinery Account 

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

 

Working Note :

(i) Calculation of loss on sale of machine on 1-6-2012

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

(ii) Calculation of loss on scrapped machine 

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

 

Offer running on EduRev: Apply code STAYHOME200 to get INR 200 off on our premium plan EduRev Infinity!

Related Searches

past year papers

,

MCQs

,

Important questions

,

study material

,

Semester Notes

,

mock tests for examination

,

Sample Paper

,

Previous Year Questions with Solutions

,

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

,

Exam

,

Viva Questions

,

shortcuts and tricks

,

Free

,

Summary

,

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

,

ppt

,

practice quizzes

,

pdf

,

ICAI Notes 5 - Depreciation Accounting (Part - 3) CA Foundation Notes | EduRev

,

Objective type Questions

,

video lectures

,

Extra Questions

;