CHAPTER

Depreciation
5
CONCEPT OF DEPRECIATION
Tangible Assets are physical assets, meaning they can be seen, touched, and used in the
production or provision of goods and services, for renting to others, or for administrative
purposes. The useful life of a tangible asset is determined by its expected usage.
Property, plant, and equipment are examples of tangible assets that meet the following
criteria:
(a) They are used in the production or supply of goods and services, for rental, or
administrative purposes.
(b) They are expected to be used for more than twelve months.
These assets are commonly referred to as fixed assets. When a fixed asset is acquired, it is
initially recorded in the accounting books at its Cost of Acquisition. However, fixed assets are
expected to generate revenue or cost savings over several accounting periods, using the same
acquisition cost and disclosing the same amount in Balance Sheet until the asset is sold or
retired isn’t justified.
Since the useful life of these assets extends beyond one year, it is necessary to allocate a
portion of the acquisition cost as an expense in each accounting period in which the asset is
used. This allocated amount is known as depreciation.

Why Does Value of Fixed Assets decreases over time..???

Various Factors are responsible for the same namely,
1. Wear and tear from business use.
2. The passage of time, even when not in use.
3. Obsolescence caused by technological or other changes.
4. Decrease in market value.
5. Depletion, primarily in the case of mines and other natural resources.
It’s essential to recognize a portion of the asset’s cost used in generating this income or cost
savings to account during an accounting year to determine the true income.
As per Schedule II under the Companies Act, 2013,
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful
life. The depreciable amount is the asset’s cost or another amount substituted for cost (e.g., in
the case of asset revaluation), minus its residual value. The useful life of an asset is the period
it is expected to be available for use by an entity, or the number of production or similar
units the entity expects to obtain from the asset.
Therefore, there are three key factors in calculating depreciation:
‰ The estimated useful life of the asset.
‰ The cost of the asset.
‰ The asset’s residual value at the end of its estimated useful life.
Depreciation of an asset commences when it is available for use, meaning it is in the necessary
location and condition to operate as intended by management. An asset doesn’t have to be
actively used, it just needs to be available for use.
Example:
Fire extinguishers installed in Premises will be depreciated even though they are not used
because to use them we need to intentionally fire up the premises
Depreciation for a given period helps to match a portion of the asset’s cost against the
revenues earned in that period, following the matching principle.
In other words, the total cost of the asset is reflected as both “expired cost” (depreciation
i.e. in PL A/c) and “unexpired cost,” (i.e. Written Down Value) in the balance sheet.
Additionally, annual depreciation reduces distributable profits, ensuring funds are available
when replacements are needed.
In essence, the cost of an asset used for business purposes must be gradually written off over
its economic (not physical) life, which needs to be estimated. It’s important to note that,
typically, at the end of the asset’s economic life, it may still have some residual value, such
as scrap value. The annual write-off amount should be such that it reduces the asset’s book
value to its estimated scrap value at the end of its economic life.

Depreciation on components of an assets

It’s worth mentioning that both Accounting Standards and the Companies Act, 2013
mandate the practice of allocating depreciation on a component basis. A business should
divide the initial amount recognized for an item of Property, Plant, and Equipment into its
significant components and then apply separate depreciation for each of these components
based on their individual useful life and residual value.
Example:
An aircraft, which is a typical example of such an asset. The aircraft comprises distinct
components like the airframe (the body of the aircraft), engines, and interiors, each having
different expected useful lives. If the airframe has the longest useful life among these major
components and is chosen as the basis for the aircraft’s overall life, it’s crucial to depreciate
the other two major components, namely the engines and interiors, over their respective
individual useful lives rather than using the airframe’s life as a reference. Smaller, low-value
components that require frequent replacement can be depreciated over the airframe’s useful
life, and the costs of their frequent replacements can be expensed as they occur.
It’s important to note that, for a part of Property, Plant, & Equipment to be recognized as
a separate component, it must meet two criteria:
(a) Component should have a significant cost compared to the total cost of the entire item
of Property, Plant, and Equipment.
(b) It should have an estimated useful life or depreciation method that differs from the other
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 parts of the Property, Plant, and Equipment.
In some cases, a significant component of an item of Property, Plant, and Equipment may
have the same useful life and depreciation method as another significant component of that
same item. In such situations, these components may be grouped together when calculating
the depreciation charge.

Objectives for Providing Depreciation

The primary goals of applying depreciation are as follows:
1. Accurate income assessment (i.e. Net Profit or Net Loss) : Depreciation is essential for
the proper determination of periodic profit or loss. Without accounting for depreciation
on Property, Plant & Equipment, a business would overlook the decline in the value of
these assets resulting from their use in production or operations. This omission would
fail to reflect the true profit or loss for the period.
2. Genuine financial position representation (i.e. Networth) : The value of Property, Plant
& Equipment should be adjusted for the depreciation incurred to portray the actual
financial status. Incorrect accounting for depreciation would lead to the disclosure of
these assets in financial statements at a value higher than their true worth. It is crucial
to present them at their remaining cost, which is the value after deducting the expired
cost as depreciation.
3. Provision for asset replacement (As Depn. is Non-Cash Expense) : Depreciation aids in
accumulating sufficient funds within the business for the replacement of assets at the
end of their useful life. Depreciation serves as a useful indicator of the amount that an
enterprise should reserve to replace a fixed asset when its economic utility is exhausted.
Nevertheless, the replacement cost of a fixed asset may also be influenced by factors like
inflation and technological advancements.
4. Determining the actual production cost : To ascertain the production cost, it is imperative
to include depreciation as a component of the cost of production.
“You will understand impact of determination on production cost in CA-Inter”
Furthermore, it’s important to note that depreciation is a non-cash expense, unlike other
regular expenditures such as wages and rent, and it doesn’t result in an immediate outflow
of cash. Depreciation, by itself, doesn’t generate funds but rather highlights the necessity to
allocate a portion of gross revenue receipts for the replacement of assets used in business
operations. This is achieved through the application of depreciation, which reduces distributable
profits.

FACTORS IN THE MEASUREMENT OF DEPRECIATION

Determining the precise amount of depreciation is a complex process that involves several
estimates. Typically, the calculation of depreciation takes into account the following factors:
1. The total cost of the asset, which includes expenses for installation, commissioning, trial
runs, and related costs.
2. The estimated useful life of the asset, considering both the duration in time and the
anticipated utility or usage in units.

Depreciation and Amortization 3

 3. The estimated scrap value, if any, at the end of the asset’s useful life.
Estimating the accurate depreciation amount involves a significant degree of estimation due
to these factors.
The above mentioned factors can be explained, in detail, as follows:
(a) The cost of a depreciable asset encompasses the financial expenditure associated with
its acquisition, installation, commissioning, and any enhancements made to enhance its
efficiency.
(b) The concept of “Useful Life” can be defined as either
(i) the duration for which a depreciable asset is anticipated to be utilized by the enterprise
or
(ii) the number of production units or similar measures that the enterprise expects
to derive from the asset’s use. The determination of an asset’s useful life involves
estimation and is typically based on a range of factors, including past experience
with similar asset types. In certain cases, factors such as estimated working hours,
production capacity, anticipated repairs and renewals, among others, are also taken
into account.
(c) Estimating the residual value can often be a challenging task. When the residual value is
considered to be insignificant, it is typically treated as zero. However, if the residual value
is expected to be significant, it is typically estimated either at the time of acquisition/
installation or during a subsequent revaluation of the asset.
The cost of Property, Plant, and Equipment includes:
(a) The purchase price, which includes non-refundable import duties and purchase taxes,
after accounting for trade discounts and rebates.
(b) Any expenses directly related to preparing the asset for operation in the intended manner,
including bringing it to the required location and condition.
(c) The initial estimation of expenses associated with dismantling, removal of the item, and
restoring the site where the asset is situated.
Examples of directly related costs include:
(a) Employee benefits costs directly arising from the acquisition or construction of the
property, plant, and equipment.
(b) Costs of site preparation.
(c) Initial delivery and handling costs.
(d) Installation and assembly expenses.
(e) Testing costs to ensure the asset functions correctly, net of any proceeds generated from
items produced during testing, such as test samples.
(f) Professional fees, such as fees for engineers hired to assist in machine installation.
In summary, any expenses that are essential to bring the asset into the desired condition and
location for its intended use become part of the asset’s cost.
However, certain expenses should not be considered part of the asset’s cost, including:

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(a) Costs associated with opening a new facility or business, such as inauguration expenses.
(b) Costs associated with introducing a new product or service, such as advertising or
promotional activities cost.
(c) Costs associated with conducting business in a new location or with a new class of
customers, including staff training costs.
(d) General administration and other overhead expenses.
Once an asset has been prepared for its intended use, no further costs should be recognized
as part of the asset’s cost, unless
1) a major repair or
2) addition significantly extends the asset’s useful life or
3) enhances its production capacity.
Therefore, costs incurred while an item is capable of functioning as intended but is not yet
in use or is used at less than full capacity should not be capitalized as part of the asset’s cost.
Similarly, the cost of relocating an asset should not be capitalized.
Maintaining an asset register with asset-specific details, such as cost, depreciation rate, and
capitalization date, is crucial. This information is necessary for any additions to existing
assets. Without adequate information, calculating annual depreciation expenses becomes
challenging. It also becomes difficult to determine gains or losses upon disposal or retirement
of a particular asset.

METHODS FOR PROVIDING DEPRECIATION

Usually, depreciation methods are formulated based on an analysis of how assets behave over
several years, making it easier to calculate the depreciation incurred by various asset types.
However, it’s essential to apply each method thoughtfully, taking into account the asset’s
characteristics and its usage conditions. It’s worth noting that, for income tax purposes,
the Diminishing Balance Method is prescribed, except for assets of a power generation and
distribution undertaking.

Straight Line Method

Under this approach, an identical sum is deducted each year throughout the operational
life of an asset with the aim of ultimately reducing the asset’s cost to either zero or its
residual value by the end of its useful life. This method is known for its simplicity and precise
outcomes, particularly when dealing with leases, as well as plant and machinery. It is also
referred to as the “Fixed Installment Method.”

Straight line depreciation =

(Cost of an asset - scrap value)
Useful life
Depreciation Amount
Straight line depreciation (in %) = × 100
Cost of asset
This method assumes that a specific tangible asset provides consistent utility throughout its
lifespan, although this may not always hold true.
In reality, repair and maintenance expenses tend to be lower in the earlier years and
increase as the asset ages, just as the asset’s capacity may vary over time. However, for assets
Depreciation and Amortization 5
with minimal repair and maintenance costs, the straight-line method may still be suitable
otherwise it should be ignored.
When employing this method, it’s crucial to consider the period an asset is utilized in a given
year. In the year of asset purchase, it may be available for use only for part of the year, so
depreciation should be adjusted to reflect the period it was available for use. For instance,
if an asset was acquired on March 1, 2022, and the enterprise’s financial year ends on
March 31, 2022, depreciation would be calculated for a period of just one month. A similar
situation arises in the year when an asset is retired from its intended use or sold.

Reducing or Diminishing Balance Method or Written Down Value (WDV)

Method
In this system, a fixed percentage of the diminishing value (WDV) of the asset is allocated each
year to reduce the asset’s value to its residual value at the end of its lifespan. Repairs and
minor renewals are considered as regular expenses. This depreciation method is commonly
applied to assets like plants and fixtures. It’s important to note that under this method, the
annual depreciation charge decreases from year to year, meaning that earlier years bear a
larger depreciation burden compared to later years. Unlike the Straight Line Method, which
results in a complete extinguishing of the asset’s value, this method ensures that the asset
retains some value.
The rationale behind this method lies in the assumption that repair costs tend to increase as
an asset ages. Therefore, higher depreciation charges are incurred in the earlier years when
repair expenses are expected to be lower, and lower depreciation charges in later years when
higher repair costs are anticipated. This approach aims to distribute a nearly consistent
burden over the asset’s entire useful life, as depreciation decreases while repair costs increase
over time. In contrast, the Straight Line Method maintains a constant depreciation charge
while repair costs tend to rise with the asset’s age.
However, there are drawbacks to this method, such as the risk of adopting a too low depreciation
rate, which might result in insufficient depreciation over the asset’s life. Additionally, when
assets are grouped in a way that individual assets are hard to identify, there could be residual
values remaining in the asset accounts even after the assets have been retired. This latter
challenge can be mitigated by maintaining a Plant register.
The rate of depreciation for this method can be determined using the following formula.

1−n
üüüüüüüüüüüüüüüüü
where, n = useful life
Much like the straight-line method, in this approach, it’s also essential to take into account
the period of usage in a given year, such as the year when an item of property, plant, and
equipment is purchased or sold, when calculating the depreciation amount.

Accounting Treatment under Straight Line and Reducing Balance

Methods:
There are two alternatives for accounting treatment of depreciation.

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First Alternative
A depreciation provision or an Accumulated Depreciation account is established to aggregate
the depreciation balance, and the assets are recorded at their historical cost. This method
is favored by the majority of organizations as it provides a clear representation of both the
original investment and the present value of the assets.
Accounting entries will be:-
Depreciation Account Dr.
To Provision for Depreciation Account or Accumulated Depreciation
Profit and Loss Account Dr.
To Depreciation Account

Second Alternative
Each year, the depreciation amount is recorded as a credit to the Asset Account, and the
Asset Account is maintained at its historical cost, reduced by the accumulated depreciation.
Accounting entries will be:
Depreciation Account Dr.
To Asset Account
Profit and Loss Account Dr.
To Depreciation Account

Sum of Years of Digits Method

This method is a modified version of the “Reducing Balance Method.” Under this approach,
the annual depreciation is determined by multiplying the initial cost of the asset (excluding
its expected scrap value) by the fraction represented by:
The number of years (including the present year ) of remaining life of the asset
Total of all digits of the life of the asset (in years )
Suppose the estimated life of an asset is 9 years; the total of all the digits from 1 to 9 is 45
i.e., 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1, or by the formula:
n (n + 1) 9 × 10
= = 45
2 2
9
The depreciation expense for the initial year will be of the asset’s cost (minus the
45
8
expected scrap value), and in the second year, it will be of the asset’s cost (excluding
45
the estimated scrap value), and so forth. While this method is not widely adopted at the
moment, its benefits align with those of the Reducing Balance Method.

Machine Hour Method

Where it is feasible to maintain a record of the actual operating hours of each machine,
depreciation can be calculated based on the number of hours the specific machine operates.
The machine hour rate for depreciation is computed after estimating the total number of
hours the machine is expected to work over its entire lifespan. However, it may need to

Depreciation and Amortization 7

be adjusted periodically to account for changes in economic and technological conditions,
ensuring that the depreciation provision aligns with the appropriate amount given the altered
circumstances. This approach is a variation of the Straight Line Method, in which depreciation
is determined annually. In contrast, under this method, depreciation is calculated for each
hour the machine is in operation.
Schedule II to the Companies Act 2013, which specifies the estimated useful life of various
assets for companies, also acknowledges this method to some extent. It recommends charging
depreciation based on the estimated useful life it suggests. However, for certain categories of
plant and machinery, it recommends a higher depreciation charge when these assets are used
for 2 or 3 shifts. In a way, Schedule II combines elements of both the straight-line method
and the machine hour method.

Production Units Method

In this method, the depreciation of the asset is ascertained by comparing the annual
production to the estimated overall production. The depreciation amount is calculated using
the following approach.
Production during the period
Depreciable Amount ×
Estimated total production
This approach is suitable for machines that manufacture products with consistent specifications.

Depletion Method
Depletion is the allocation of the cost of wasting natural resources such as oil, gas, timber,
and minerals to the production process. 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 to be
extracted. Annual depreciation will be the quantity extracted multiplied by the rate per unit.

PROFIT OR LOSS ON THE SALE/DISPOSAL OF PROPERTY, PLANT AND

EQUIPMENT
When a depreciable asset is sold during the year, depreciation is recorded for the period it
was utilized within that year. The written down value, after accounting for this depreciation,
is used to determine the profit or loss from the sale of the asset. Any resulting profit or
loss on the sale of the asset is then reflected in the profit and loss account. Consequently, all
transactions related to the sale and the profit or loss from the asset sale are recorded in the
corresponding asset account.
Alternatively, an alternative approach is to create a new account titled “Asset Disposal
Account” in the ledger to specifically track the profit or loss on the sale of the asset. In this
scenario, the book value of the asset is transferred from the asset account to the Asset Disposal
Account, and all sale-related entries, such as sale proceeds and profit or loss calculations, are
documented within the Asset Disposal Account.
Example: The book value of the asset as on 1st January, 2022 is Rs 50,00,000. Depreciation
is charged on the asset @10%. On 1st July 2022, the asset is sold for Rs 32,00,000.
Calculate Profit/loss (ICAI Study Material)
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Book value of asset as on 1st Jan., 2022 50,00,000
Less: Depreciation for six months @10% p.a. (from 1st Jan., 2022 to (2,50,000)
30th June, 2022)
WDV as on 1st July, 2022 47,50,000
Less: Sale proceeds on 1st July, 2022 (32,00,000)
Loss on sale of asset 15,50,000

CHANGE IN THE METHOD OF DEPRECIATION

The depreciation method used for an asset should undergo an annual review, and if there’s
a substantial alteration in the anticipated pattern of utilizing the asset’s future economic
benefits, the method should be adjusted to align with the revised pattern. Whenever a change
in the depreciation method occurs, it’s treated as a modification in accounting estimate in
accordance with Accounting Standards. The impact of this alteration should be quantified
and disclosed separately. Such a change in an accounting estimate can have an impact
on either the current period exclusively or on both the current period and future periods
(i.e.Change in method of Depreciation will not have retrospective effect)

REVISION OF THE ESTIMATED USEFUL LIFE OF PROPERTY, PLANT AND

EQUIPMENT
The residual value and the anticipated useful life of an asset should be evaluated annually,
and if these expectations deviate from prior estimates, any adjustments should be treated as
changes in accounting estimates in accordance with Accounting Standards.
In the event of a revision to the estimated useful life of the asset, the written down value
or the remaining depreciable amount should be expensed over the updated estimated useful
life of the asset.

REVALUATION OF PROPERTY, PLANT AND EQUIPMENT

(Refer Class Diagram for Better understanding)
Upon initially recognizing an asset, if its fair value can be reliably determined, it may be
reported at the revalued amount, which is the fair value at the revaluation date, adjusted for
accumulated depreciation and any accumulated impairment losses (in cases of a permanent
decline in value), if applicable. If an entity chooses to revalue:
(a) Revaluations should occur at regular intervals, such as yearly, to ensure that the carrying
amount does not substantially deviate from what would be determined using the fair
value at the end of the reporting period.
(b) When one item of Property, Plant, and Equipment is revalued, the entire class to which
the asset belongs should also be revalued.
(c) If the carrying amount of an asset increases due to revaluation, this increase should be
credited to the revaluation surplus and accumulated in equity. However, this increase

Depreciation and Amortization 9

 should be recognized in the Profit and Loss statement to the extent of reversing a prior
decrease in the asset that was previously recognized in the Profit and Loss statement.
(d) If the carrying amount of an asset decreases due to revaluation, this decrease should be
recognized in the Profit and Loss account. However, this decrease should be debited to
the revaluation surplus to the extent of reversing a prior increase in the asset, which
was previously recognized in the revaluation surplus.
(e) The Revaluation Surplus can be transferred directly to retained earnings when the asset
is derecognized. This may involve transferring the entire surplus when the asset is retired
or disposed of. Such a transfer from Revaluation Surplus to Retained Earnings cannot
be achieved through the Profit or Loss.
(f) Alternatively, in the case of an upward revaluation, any excess depreciation due to such
revaluation can be transferred from Revaluation Surplus to Retained Earnings. Again,
this transfer from Revaluation Surplus to Retained Earnings cannot be made through
the Profit or Loss.
It is essential to note that the revaluation of Property, Plant, and Equipment is an accounting
policy choice and not mandatory under accounting standards or the Companies Act, 2013.

INTANGIBLE ASSETS
An intangible asset is a discernible, non-monetary asset that lacks physical substance,
maintained for the purpose of contributing to the production or provision of goods or
services, for leasing to others, or for administrative functions. Examples:-
(a) Streaming rights of Films / songs on platforms like Netflix, Hotstar, Prime Video, Spotify,
Gaana etc
(b) Patents (e.g. patents of vaccines)
(c) Trademarks (e.g. McDonaldsTM , DominozTM etc)
(d) Copyright
(e) Goodwill (purchased)
(f) Computer Softwares like Tally, Windows
Intangible assets constitute a significant portion of a company’s balance sheet. It’s important
to note that there are situations where intangible assets can hold more value for entities than
their tangible counterparts.
For example, a multi-year customer contract guaranteeing over 75% of a company’s revenue
can be a substantial asset, at times surpassing the value of tangible assets. Likewise, during the
acquisition of Air India, the tangible assets mainly comprised older planes requiring significant
maintenance. However, one of the primary factors that made Air India an appealing target
was its prime landing slots (an intangible asset) at various airports around the world.
Intangible assets can be included in financial statements if they meet the following criteria:
(i) The intangible asset is identifiable, meaning the entity can rent, sell, exchange, or distribute
the specific future economic benefits associated with the asset without compromising
benefits from other assets used in the same revenue-earning activity.

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(ii) It is likely that the future economic benefits associated with the asset will accrue to the
enterprise.
(iii) The enterprise has control over the intangible asset, which means it has the ability to
derive economic benefits from the asset while also being able to restrict others’ access to
those benefits.
(iv) The cost of the intangible asset can be measured reliably.
When acquired separately, intangible assets are usually initially measured at cost since the
cost can be reliably determined in such cases. The cost of the intangible asset comprises the
purchase price, any import duties and taxes (except those subsequently recoverable from tax
authorities), and any directly attributable expenditures related to making the asset ready
for its intended use, such as professional fees for legal services. Trade discounts and rebates
are subtracted when determining the cost, similar to how the cost of a tangible asset is
calculated.
Intangible assets acquired as part of an acquisition, government grants, internally generated
goodwill/intangible assets, or through asset exchanges are treated differently at an intermediate
level.
Derecognition (removal from the balance sheet) of an intangible asset occurs upon disposal or
when no future economic benefits are expected from its use and subsequent disposal. Gains
or losses arising from the retirement or disposal of an intangible asset are determined as the
difference between the net disposal proceeds and the carrying amount (book value) of the
asset. These gains or losses should be recognized as income or expenses in the statement of
profit and loss (i.e P&L A/c).

Difference between Tangible and Intangible Assets

Tangible Assets Intangible Assets
Tangible assets are assets that possess a These assets can be identified but lack physical
material form, meaning they can be visually form and are maintained for utilization
perceived and physically touched. They are in the production or provision of goods or
utilized in the production or provision of services, for leasing to external parties, or for
goods or services, for leasing to third parties, administrative purposes.
or for administrative functions.
Tangible Assets have a limited lifespan Intangible Assets have a defined duration
determined by anticipated utilization. typically determined by contractual terms.
However, in certain situations, intangible
assets may possess an indefinite lifespan, like
purchased goodwill.
The useful life is determined by anticipated The anticipated useful life of Intangible Assets
usage, without any predefined assumptions. is generally considered not to exceed 10 years
unless there is evidence indicating a different
timeframe.

Depreciation and Amortization 11

Tangible Assets undergo depreciation Intangible Assets are subject to amortization
throughout their useful life, which means the over their useful life. In simpler terms, the
gradual reduction in the value of these assets annual reduction in the value of intangible
each year is referred to as depreciation. assets is referred to as amortization.
Examples- Furniture, Machinery, Computer Examples- include softwares, purchased
for office use etc. goodwill, trademarks, patents etc.

AMORTISATION
Amortization in the context of intangible assets is similar to the concept of depreciation for
tangible assets. In essence, the process of reducing the value of an intangible asset annually
is referred to as amortization.
Amortization can be defined as the systematic allocation of the depreciable amount of an
intangible asset over its expected useful life. The depreciable amount is the asset’s cost minus
its anticipated residual value.
The useful life of an intangible asset is either:
(a) the period during which the asset is anticipated to be utilized by the enterprise; or
(b) the number of production units or similar measures expected to be derived from the
asset by the enterprise.
Residual value represents the amount an enterprise expects to receive for an asset at the end
of its useful life, after accounting for anticipated disposal costs.
Amortization begins when the asset is available for use. It is generally assumed that the useful
life of an intangible asset does not exceed ten years from the asset’s availability for use, unless
contrary evidence exists.
Similar to depreciation, the method of amortization employed should mirror the consumption
pattern of the asset’s economic benefits by the enterprise. If this pattern cannot be reliably
determined, the straight-line method should be utilized. The amortization expense for each
period is recognized as an expenditure, unless there is permission or requirement to include
it in the carrying amount of another asset.
Given the nature of intangible assets, it is typically assumed that the residual value is zero,
unless:
(a) a third party has committed to purchasing the asset at the end of its useful life; or
(b) there is an active market for the asset, and:
(i) the residual value can be determined based on that market; and
(ii) it is probable that such a market will exist at the end of the asset’s useful life.
The amortization period and method should be reviewed at least at the end of each financial
year. If the expected useful life significantly differs from previous estimates, the amortization
period should be adjusted accordingly. If there is a substantial change in the expected pattern
of economic benefits from the asset, the amortization method should be modified to reflect
the altered pattern.

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TEST YOUR KNOWLEDGE
True and False
1. Increase in market value of a fixed asset is one of the reasons for depreciation being
charged.
 (ICAI Study Material)
Sol. False: Depreciation is associated with a reduction in an asset’s market value, while an
increase in market value can lead to the process of revaluation
2. Depreciation is a cash expenditure like other normal expenses.
 (ICAI Study Material)
Sol. False: Depreciation differs from typical expenses as it does not involve a cash outflow.
3. Cost of property, plant and equipment includes purchase price, refundable taxes &
import duties after deducting any discount or rebate.
 (ICAI Study Material)
Sol. False: Non-refundable taxes & duties are included in the cost.
4. Cost of fixed asset should also include the cost of opening a new facility such as inauguration
costs. (ICAI Study Material)
Sol. False: Inauguration costs are not the part of the cost.
5. Depreciation is charged with a constant amount under straight line method and charged
with a constant percentage under diminishing balance method. (ICAI Study Material)
Sol. True: The Straight Line Method (SLM) yields a consistent depreciation amount, while
the Diminishing Balance Method maintains a constant depreciation rate.
6. In case an item of Property, Plant & Equipment is revalued, whole class of assets to
which that asset being revalued belongs should be revalued. (ICAI Study Material)
Sol. True: Revaluation is done for the entire class of assets.
7. In case the carrying amount of an asset is decreased due to revaluation, such decrease
should always be recognized in the Profit and Loss account. (ICAI Study Material)
Sol. False: If an asset’s value decreases due to revaluation, it should initially be charged to
any existing Revaluation Reserve and then to the Profit & Loss account.
8. Akash purchased a machine for Rs 12,00,000. Estimated useful life is 10 years and
scrap value is Rs 1,00,000. Depreciation for the first year using sum of the years digit
method shall be Rs 2,00,000. (ICAI Study Material)
Sol. True: The depreciation using the Sum of Years Digits method can be calculated as follows:
10/55 x (12,00,000 – 1,00,000) = 2,00,000.
9. Depreciation cannot be provided in case of loss, in a financial year.
 (ICAI Study Material)
Sol. False: Depreciation is an expense that is deducted from revenue to calculate profit. Hence,
it must be accounted for, even in instances where a financial year results in a loss.
10. Providing for depreciation also helps in providing for accumulation of funds to facilitate

Depreciation and Amortization 13

 the replacement at the end of its useful life. (ICAI Study Material)
Sol. True: Depreciation, as a non-cash expense, lowers the amount of profits available for
distribution, which, in turn, helps accumulate funds for asset replacement when necessary
11. If the equipment account has a balance of Rs 12,50,000 and the accumulated
depreciation account has a balance of Rs 4,00,000, the written down value of same
shall be `16,50,000. (ICAI Study Material)
Sol. False: WDV will be = `8,50,000 (`12,50,000 – `4,00,000)
12. Sum of the years digit method is an example of an accelerated method of charging
depreciation. (ICAI Study Material)
Sol. True: The sum of the years digit method results in a higher depreciation charge during
the initial years.
13. Over the life of an asset subject to depreciation, the accelerated method will result in
less Depreciation Expense in early years and more depreciation in later years of its life.
(ICAI Study Material)
Sol. False: Conversely, in the diminishing balance method, higher depreciation is applied in
the initial years.
14. While depreciating land cost, Straight line method shall give more depreciation than the
written down value. (ICAI Study Material)
Sol. False: Land is not a depreciable asset.
15. Provision for depreciation account is debited at the time of recording the depreciation
on an asset. (ICAI Study Material)
Sol. False: The Provision for Depreciation account is attributed with a credit entry during
the depreciation charge.
16. If adequate maintenance expenditure is incurred with relation to running repairs of an
asset, we need not charge any depreciation. (ICAI Study Material)
Sol. False: Depreciation entails distributing the asset’s cost over its anticipated useful life.
Routine maintenance and repairs, which may be necessary throughout its lifespan, are
treated as expenses, and depreciation is applied regardless.
17. When a property, plant or equipment is sold then provision for depreciation account
is debited, asset account is credited and any gain or loss is recorded to profit and loss
account. (ICAI Study Material)
Sol. True: When selling an asset, the respective asset account is credited, the provision for
depreciation account is debited, and any resulting gain or loss is charged to the profit
& loss account.
18. While calculating the depreciation as per diminishing balance method, the salvage value
of the asset at the end of its life is reduced from its cost. (ICAI Study Material)
Sol. False: Under the diminishing balance method, salvage value is not considered initially,
as it assumes that at the end of the asset’s life, the remaining value shall be its salvage
value.
19. Any change in the estimated useful life of an asset should be accounted for as a change
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14 Accounting W
 in an accounting estimate in accordance with Accounting Standards.
 (ICAI Study Material)
Sol. True: Any change in the useful life of an asset is accounted for as a change in estimate
20. An intangible asset is a non identifiable, non monetary asset.
 (ICAI Study Material)
Sol. False: An intangible asset is an identifiable non-monetary asset used in the production
and supply of goods and services
21. Land can be considered as an asset subject to depreciation.
Sol. False: Land is ineligible for depreciation under AS-10, as it does not meet the criteria
for depreciation.
22. Depreciation, like regular expenses, involves a cash outflow.
Sol. False: Depreciation is considered a non-cash cost since it does not entail any actual cash
disbursement.
23. Depreciation is an expense that is systematically allocated over time.
Sol. True: Depreciation is applied to the fixed asset’s value throughout its useful life, allowing
the gradual amortization of any initial capital investment over that period.
24. Depreciation cannot be recorded during a financial year if the company incurs a loss.
Sol. False: Depreciation is an expense deducted from profit, and it must be accounted for in
the financial year of the business, regardless of whether there is a profit or a loss.
25. The depreciable amount is the variance between the asset’s historical cost and its market
value.
Sol. False: The depreciable amount is calculated as the historical cost minus the salvage value.
26. Depreciation represents a non-cash cost and does not lead to any cash disbursement.
Sol. True: Depreciation is a non-cash expenditure that does not involve any cash outflow
within the business.

MULTIPLE CHOICE QUESTIONS

1. Original cost = Rs 12,60,000; Salvage value = Nil; Useful life = 6 years. Depreciation for
the first year under sum of years digits method will be
 (ICAI Study Material)
(a) Rs 3,60,000 (b) Rs 1,20,000
(c) Rs 1,80,000 (d) None of the above
Sol. (a) Rs 3,60,000
2. Obsolescence of a depreciable asset may be caused by:
I. Technological changes.
II. Improvement in production method.
III. Change in market demand for the product or service output.
IV. Legal or other restrictions.
Depreciation and Amortization 15
 (ICAI Study Material)
(a) Only (I) above (b) Both (I) and (II) above
(c) All (I), (II), (III) and (IV) above (d) None of the above
Sol. (c) All (I), (II), (III) and (IV) above
3. The number of productions of similar units expected to be obtained from the use of an
asset by an enterprise is called as
 (ICAI Study Material)
(a) Unit life (b) Useful life
(c) Production life (d) None of the above
Sol. (b) Useful life
4. If a concern proposes to discontinue its business from March 2018 and decides to dispose
of all its plants within a period of 4 months, the Balance Sheet as on March 31, 2018
should indicate the plants at their
 (ICAI Study Material)
(a) Historical cost (b) Net realizable value
(c) Cost less depreciation (d) None of the above
Sol. (b) Net realizable value
5. In the case of downward revaluation of a plant which is for the first time revalued, the
account to be debited is
 (ICAI Study Material)
(a) Plant account (b) Revaluation Reserve
(c) Profit & Loss account (d) None of the above
Sol. (c) Profit & Loss account
6. The portion of the acquisition cost of the tangible asset, yet to be allocated is known as
 (ICAI Study Material)
(a) Written down value (b) Accumulated value
(c) Realisable value (d) None of the above
Sol. (a) Written down value
7. The main objective of providing depreciation is to
 (ICAI Study Material)
(a) Create secret reserve (b) Reduce the book value of assets
(c) Allocate cost of the assets (d) None of the above
Sol. (c) Allocate cost of the assets
8. Original cost of a machine was Rs 25,20,000 salvage value was Rs 1,20,000, useful life
was 6 years. Annual depreciation under Straight Line Method
 (ICAI Study Material)

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16 Accounting W
 (a) `4,20,000 (b) `4,00,000
(c) `3,00,000 (d) None of the above
Sol. (b) `4,00,000
9. The cost of a machine is Rs 20,00,000. Two years later the book value is Rs 10,00,000.
The Straight-line percentage depreciation is
 (ICAI Study Material)
(a) 50% (b) 33-1/3%
(c) 25% (d) None of the above
Sol. (c) 25%
10. A machinery with original cost of Rs 10,00,000 and Nil Salvage value acquired on 1st
April 2019 with 4 years useful life was depreciated using Straight Line Method. It was
decided to sell the machinery on 1st October 2021 for Rs 1,20,000. What shall be the
gain or (loss) on the sale of Machinery?
 (ICAI Study Material)
(a) Loss of Rs 1,30,000 (b) Gain of Rs 1,20,000
(c) Loss of Rs 5,000 (d) None of the above
Sol (c) Loss of Rs 5,000
11. Which of the following assets does not depreciate?
(a) Machinery and equipment (b) Patents
(c) Land (d) None of the above
Sol. (c) Land
12. A company purchased a machinery on April 01, 2017, for Rs 15,00,000. It is estimated
that the machinery will have a useful life of 5 years after which it will have no salvage
value. The depreciation charged during the year 2021-22 was
(a) `5,00,000 (b) `4,00,000
(c) `3,00,000 (d) None of the above
Sol. (c) `3,00,000
13. If the equipment account has a balance of Rs 22,50,000 and the accumulated depreciation
account has a balance of Rs 14,00,000, the book value of the equipment is
(a) `36,50,000 (b) `8,50,000
(c) `14,00,000 (d) None of the above
Sol. (b) `8,50,000
14. A plant with original cost of Rs 50,00,000 was revalued after 2 years resulting in
credit to Revaluation Surplus account of Rs 4,00,000. Towards the year end of 2019-
20, due to COVID-19 the plan value had gone down by Rs 5,00,000 and accordingly
management decided to revalue the same. What shall be the impact of this downwards
revaluation on the Profit & Loss Account?
(a) Debit of Rs 5,00,000

Depreciation and Amortization 17

 (b) Debit of Rs 1,00,000
(c) Credit of Rs 5,00,000
(d) None of the above
Sol. (b)
15. In respect of intangible assets, there is a presumption that the useful life of an intangible
asset will not exceed
(a) 2 years (b) 3 years
(c) 10 years (d) None of the above
Sol. (c)
16. A company developed a technology to enhance the battery life of mobile phones. The cost
of development have been capitalized as an intangible asset at 5,00,000. The company
estimates the life of the technology developed to be 3 years. The company has forecasted
that 50% of sales will be in year 1, 35% in year 2 and 15% in year 3. What should be
the amortisation charge in third year?
(a) 2,50,000 (b) 75,000
(c) 1,75,000 (d) None of the above
Sol. (b)
17. An intangible asset is an asset
(a) with no physical existence
(b) generated internally by the business
(c) cannot be sold
(d) None of the above
Sol. (a)

THEORETICAL QUESTIONS
1. Distinguish between Straight line method of depreciation and Written down value method
of depreciation.
Sol. The straight-line depreciation method evenly allocates depreciation expenses over the
entire useful life of a depreciable tangible asset, ultimately reducing its book value to zero
or its salvage value. In contrast, the reducing balance method applies a fixed percentage
to the diminishing asset balance each year to reach its salvage value by the end of its
useful life. The key differences between these methods are as follows:
1. The straight-line method maintains a consistent annual depreciation expense, while
the reducing balance method reduces depreciation charges over time as the asset
ages.
2. Under the straight-line method, it’s possible to fully depreciate the asset, but with
the reducing balance method, the asset can never reach a fully depreciated state.
3. In the straight-line method, depreciation expenses remain constant, while repair costs
increase as the asset ages, resulting in non-uniform total expenses throughout the
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18 Accounting W
 asset’s life. Conversely, the reducing balance method starts with higher depreciation
charges in the initial years, generally accompanied by lower repair expenses. As the
asset ages, depreciation charges decrease, while repair expenses increase, leading to
a more balanced distribution of costs throughout the asset’s life.
2. Write short note on Depletion method of depreciation
Sol. Natural resources includes tangible assets such as mineral deposits, oil and gas reserves,
and timber. These resources diminish as they are utilized. The calculation of depletion
per unit is determined by the following formula:
Acquisition cost − residual Value
Estimate life in terms of production units

3. What factors are considered for calculation of depreciation of a plant?

 (ICAI Study Material)
Sol. The elements taken into account in the depreciation calculation encompass:
(i) The total cost of the asset, which includes installation, commissioning, and trial run
expenses.
(ii) The estimated useful lifespan of the asset.
(iii) The projected scrap value, if applicable, at the conclusion of the asset’s useful life.

qqq

Depreciation and Amortization 19

 CHAPTER
Depreciation and
4 Amortization

PRACTICAL QUESTIONS
1. A company purchased a machinery for `1,30,000 on 1st April, 2019 and paid
`20,000 for freight & installation charges. On 1st October, 2021 another machine was
purchased for `50,000 and sold old machinery for `1,00,000. The machine purchased on
1st October, 2021 was installed on 1st January, 2022.
Under existing practice, the company is charging depreciation @ 20% p.a. on the original
cost. However, from 1Wst April, 2021 it decided to adopt WDV method and charge
depreciation @15% p.a. You are required to prepare Machinery A/c from 1st April, 2019
to 31st March, 2022. [Dec. 2022, 4 Marks]
Sol.
Machinery A/c

Date Particulars Amount Date Particulars Amount

1.4.2019 To Bank A/c-(M1) 1,30,000 31.3.2020 By Depn. A/c-(M1) 30,000
To Bank A/c-(M1) 20,000 By Balance c/d-(M1) 1,20,000
Total 1,50,000 Total 1,50,000
1.4.2020 To Bal. b/d-(M1) 1,20,000 31.3.2021 By Depn. A/c-(M1) 30,000
By Balance c/d-(M1) 90,000
Total 1,20,000 Total 1,20,000
1.4.2021 To Bal. b/d-(M1) 90,000 1.10.2021 By Depn. A/c -(M1) 6,750
1.10.2021 To P&L A/c (Profit) 16,750 By Bank A/c 1,00,000
1.01.2022 To Bank A/c -(M2) 50,000 (sale) -(M1)
31.3.2022 By Depn. A/c-(M2) 1,875
By Balance c/d-(M2) 48,125
Total 1,56,750 Total 1,56,750

Working Note:

I Machinery ` II Machinery `
1st April 2019 1,50,000 1st Jan, 2022 50,000
Less: Depreciation @ 20% Less Depreciation @ 15%
On 31st Mar. 2020 (30,000) On 31st Mar 2021 (1,875)
1st April 2020 1,20,000 Balance on 31st Mar, 2022 `48,125
Less Depreciation @ 20%
On 31st Mar 2021 (30,000)
1st April 2021 90,000
Less Depreciation @ 15%
On 1st Oct, 2021 (6,750)
`83,250
Less: Sold 1,00,000
Profit on sale `16,750

*Machinery purchased on 1 Oct. 2021 was put in use on 1 Jan, 2022 so depreciation has been
charged from this date only.

2. A firm purchased second hand machinery on 1st January, 2019 for `3,00,000,
subsequent to which `60,000 and `40,000 were spent on its repairs and installation,
respectively. On 1st July, 2020 another machinery was purchased for `2,60,000. On 1st
July, 2021, the first machinery having become outdated was auctioned for `3,20,000
and on the same date, another machinery was purchased for `2,50,000.
On 1st July, 2022, the second machinery was also sold off and it fetched `2,30,000.
Depreciation was provided on machinery @ 10% on the original cost annually on 31st
December, under the straight line method.
Required:

Prepare the following A/cs in the books of the company: (i) Machinery A/c for the years
ending Dec. 31, 2019 to 2022 and (ii) Machinery Disposal A/c. (ICAI Study Material)
Sol.
Dr. Machinery A/c Cr.
Date Particulars ` Date Particulars `

01.01.2019 To Bank A/c (A) 3,00,000 31.12.2019 By Depn. (A) 40,000

– Cost
- Repairs 60,000 By Balance c/d (A) 3,60,000
- Installation 40,000
4,00,000 4,00,000
01.01.2020 To Balance b/d 3,60,000 31.12.2020 By Depn.
(A) 40,000
(B) 13,000 53,000
01.07.2020 To Bank A/c (B) 2,60,000 By Balance c/d
(A) 3,20,000
(B) 2,47,000 5,67,000
6,20,000 6,20,000
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524 Accounting W
01.01.2021 To Balance b/d 5,67,000 01.07.2021 By Machinery 3,00,000
Disposal A/c (A)
01.07.2021 To Bank A/c (C) 2,50,000 By Depn. A/c
(A) 20,000
(B) 26,000
(C) 12,500 58,500
By Balance c/d
(B) 2,21,000
(C) 2,37,500 4,58,500
8,17,000 8,17,000
01.01.2022 To Balance b/d 4,58,500 01.07.2022 By Machinery 2,08,000
Disposal A/c (B)
By Depn. A/c
(B) 13,000
(C) 25,000 38,000
By Balance c/d 2,12,500
4,58,500 4,58,500

Machinery Disposal A/c

Date Particulars ` Date Particulars `

01.07.2021 To Machinery A/c 3,00,000 01.07.2021 By Bank A/c 3,20,000

(A)
To Profit Loss A/c 20,000
(Profit)
3,20,000 3,20,000
01.07.2022 To Machinery A/c 2,08,000 01.07.2022 By Bank A/c 2,30,000
(B)
To P & L A/c 22,000
(Profit)
2,30,000 2,30,000

3. The LG Transport company purchased 10 trucks at `45,00,000 each on 1st April 2019.
On October 1st, 2021, one of the trucks is involved in an accident and is completely
destroyed and `27,00,000 is received from the insurance in full settlement. On the
same date another truck is purchased by the company for the sum of `50,00,000.
The company write off 20% on the original cost per annum. The company observe the
calendar year as its financial year.
Give the motor truck A/c for two year ending 31 Dec, 2022.  (ICAI Study Material)

Depreciation and Amortization 525

Sol.

Date Particulars Amount Date Particulars Amount

2021 2021
Jan-01 To balance b/d 2,92,50,000 Oct-01 By bank A/c 27,00,000
Oct-01 To Profit & Loss A/c 4,50,000 Oct-01 By Depn. on lost 6,75,000
(Profit on settlement assets

of Truck) Dec-31 By Depn. A/c 83,50,000

Oct-01 To Bank A/c 50,00,000 Dec-31 By balance c/d 2,29,75,000
3,47,00,000 3,47,00,000
2022 2022
Jan-01 To balance b/d 2,29,75,000 Dec-31 By Depn. A/c 91,00,000
Dec-31 By balance c/d 1,38,75,000
2,29,75,000 2,29,75,000

Working Note:
1. Profit on settlement of truck

`
Original cost as on 1.4.2019 45,00,000
Less: Depn. for 2019 (6,75,000)
38,25,000
Less: Depn. for 2020 (9,00,000)
29,25,000
Less: Depn. for 2021 (9 months) (6,75,000)
22,50,000
Less: Amount received from Insurance company (27,00,000)
4,50,000

4. The Machinery A/c of a Factory showed a balance of `19,00,000 on 1st January, 2022.
Its A/cs 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 2022, a new machinery was acquired at a cost of `2,80,000 and installation
charges incurred in erecting the machine works out to `8,920 on the same date. On
1st June, 2022 a machine which had cost `4,37,400 on 1st January 2020 was sold
for

`75,000. Another machine which had cost `4,37,000 on 1st January, 2021 was
scrapped on the same date and it realised nothing.
Write a machinery A/c for the year 2022, allowing the same rate of depreciation as in
the past, calculating depreciation to the nearest multiple of a Rupee.

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526 Accounting W
 (ICAI Study Material)
Sol.
Plant and Machinery A/c

` `
2022 2022
Jan. 1 To Balance b/d 19,00,000 June 1 By Bank (Sales) 75,000
June. 1 To Bank 2,88,920 By Depn. 14,762
(2,80,000 + 8,920) (on sold machine)
By Loss on sale 2,64,532
By Loss on scrapping 3,76,912
the machine
By Depn. (on scrapped 16,388
machinery)
By Depn. (Note iii) 1,32,094
By Balance c/d 13,09,232
21,88,920 21,88,920

Working Note:

(i) Calculation of loss on sale of machine on 1-6-2022

`

Cost on 1-1-2020 4,37,400

Less: Depreciation @ 10% on `4,37,400 (43,740)

W.D.V. on 31-12-2020 3,93,660

Less: Depreciation @ 10% on `3,93,660 (39,366)

W.D.V. on 31-12-2021 3,54,294

Less: Depreciation @ 10% on `3,54,294 for 5 months (14,762)
3,39,532

Less: Sale proceeds on 1-6-2022 (75,000)

Loss 2,64,532
(ii) Calculation of loss on scrapped machine
`

Cost on 1-1-2021 4,37,000

Less: Depreciation @ 10% on `4,37,000 (43,700)

W.D.V. on 1-1-2022 3,93,300

Less: Depreciation @ 10% on `3,93,300 for 5 months (16,388)

Loss 3,76,912
(iii) Depreciation
Balance of machinery A/c on 1-1-2022 19,00,000
Less : W.D.V of machinery sold 3,54,294

Depreciation and Amortization 527

 W.D.V. of machinery scrapped 3,93,300 (7,47,594)
W.D.V. of other machinery on 1-1-2022 11,52,406
Depreciation @ 10% on `11,52,406 for 12 months 1,15,240
Depreciation @ 10% on `2,88,920 for 7 months 16,854
1,32,094

5. A firm’s plant and machinery A/c at 31st December, 2021 and the corresponding
depreciation provision A/c, broken down by year of purchase are as follows:
Year of Purchase Plant and Machinery at cost ` Depn. Provision `
2005 2,00,000 2,00,000

2011 3,00,000 3,00,000

2012 10,00,000 9,50,000

2013 7,00,000 5,95,000

2020 5,00,000 75,000

2021 3,00,000 15,000

30,00,000 21,35,000

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 2022 the following transactions took place:
1. Purchase of plant and machinery amounted to `15,00,000
2. Plant that had been bought in 2011 for `170,000 was scrapped.
3. Plant that had been bought in 2012 for `90,000 was sold for `5,000.
4. Plant that had been bought in 2013 for `2,40,000 was sold for `15,000.
You are required to:
Calculate the provision for depreciation of plant and machinery for the year ended
31st December, 2022. 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 A/c. You are also required to prepare
the following ledger A/cs during 2022.
(i) Plant and machinery at cost;
(ii) Depreciation provision;
(iii) Sales or disposal of plant and machinery. (ICAI Study Material)
Sol. Calculation of provision for depreciation of plant and machinery for the year ended 31st December,

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528 Accounting W
 2022.

Plant purchased in ` `

2005 nil

2011 nil

2012 50,000

2013 1/2 year at 10% on `2,40,000 12,000

1 year at 10% on `4,60,000 46,000 58,000

2020 10% on `5,00,000 50,000

2021 10% on `3,00,000 30,000

2022 1/2 year at 10% on `15,00,000 75,000

2,63,000

Plant and Machinery A/c (for 2022) at Cost

` `
To Balance b/d 30,00,000 By Disposals A/c:
To Bank A/c 15,00,000 Scrapped 1,70,000
Sold 3,30,000
By Balance c/d 40,00,000
45,00,000 45,00,000

Depreciation Provision A/c (for 2022)

` `
To Disposal A/c By Balance b/d 21,35,000
Scrapped - 2011 assets 1,70,000 By Profit and Loss A/c 2,63,000
Sold - 2012 assets 90,000
Sold - 2013 assets 2,16,000 4,76,000
To Balance c/d 19,22,000
23,98,000 23,98,000

Disposal A/c (for 2022)

` `
To Plant and Machinery: By Provision for Depn. 4,76,000
Scrapped 1,70,000 By Cash-Sales Proceeds 20,000
Sold 3,30,000 By Loss on sales 4,000

Depreciation and Amortization 529

 5,00,000 5,00,000

6. On 1.1.2020 machinery was purchased for `40,000. On 1.7.2021 addition were made
to the amount of `20,000. On 31.3.2022 machine purchased on 1.7.2021 costing
`6,000 was sold for `5,500 & on 30.6.2022 machinery purchased on 1.1.2020 costing
`16,000 was sold for `13,350. On 1.10.2022 addition were made to the amount of
`10,000.
Show Machinery A/c, Depreciation provision A/c, and Asset disposal A/c for 3 years
2020, 2021, 2022. Depreciate Machinery at 10% p.a. by W.D.V. method
Sol.
Machinery A/c

Date Particulars ` Date Particulars `

1.1.2020 To Bank A/c 40,000 31.12.2020 By Balance c/d 40,000
40,000 40,000
1.1.2021 To Balance b/d 40,000 31.12.2021 By Balance c/d 60,000
1.7.2021 To Bank A/c 20,000
60,000 60,000
1.1.2022 To Balance b/d 60,000 31.3.2022 By Asset disposal A/c 6,000
1.10.2022 To Bank A/c 10,000 30.6.2022 By Asset disposal A/c 16,000
31.12.2022 By Balance c/d 48,000
70,000 70,000

Provision for Depreciation A/c (WDV 10%)

Date Particulars ` Date Particulars `

31.12.2020 To Balance c/d 4,000 31.12.2020 By Depn. A/c 4,000
4,000 4,000
31.3.2022 To Balance c/d 8,600 1.1.2021 By Balance b/d 4,000
31.12.2021 By Depn. A/c 4,600
8,600 8,600
31.12.2021 To Asset disposal A/c 300 1.1.2022 By balance b/d 8,600
30.6.2022 To Asset disposal A/c 3040 31.12.2022 By Depn. A/c 3,524
31.12.2022 To Balance c/d 8,784
12,124 12,124

Depreciation A/c

Date Particulars ` Date Particulars `

31.12.2020 To Depn. provision 4,000 31.12.2020 By P&L A/c 4,000
A/c
4,000 4,000

P
530 Accounting W
31.12.2021 To Depn. provision 4,600 31.12.2021 By P&L A/c 4,600
A/c
4,600 4,600
31.3.2022 To Asset disposal A/c 142 31.12.2022 By P&L A/c 4,314
30.6.2022 To Asset disposal A/c 648
31.12.2022 To Depn. provision 3,524
A/c
4,314 4,314

Asset Disposal A/c

Date Particulars ` Date Particulars `

31.3.2022 To Machinery A/c 6,000 31.12.2022 By Bank A/c (sale) 5,500
By Depn. provision A/c 300
By Depn. A/c 142
By P&L A/c (loss) 58
30.6.2022 To Machinery A/c 16,000 30.6.2022 By Bank A/c (sale) 13,350
30.6.2022 To P&L A/c 1,038 By Depn. provision A/c 3,040
By Depn. A/c 648
23,038 23,038

‰ Depreciation upto the date of disposal is directly credited to asset disposal A/c alternatively it
can be routed through depreciation provision A/c.

‰ Similarly asset sold can be A/ced through asset Disposal A/c in earlier Question also

Working notes:

(1) Sold on 31.3.2022 (2) Sold on 30.6 .2022 (3) Deprecation on

31.12.2022
1.7.2021 Cost 6000 1.1.2020 Cost 1600.0 Balance of old 51400
machine on
1.1.2022
31.12.2021 Depreciation 300 31.12.2020 Depreciation 1600 (-) sold 5700

1.1.2022 Balance 5700 1.1.2021 Balance 14400 (-)sold 12960

31.3.2022 Depreciation 142 31.12.2021 Depreciation 1440

31.3.2022 Balance 5,558 1.1.2022 Balance 12960 Balance 32740

Sold’ for 5,500 30.6.2022 Depreciation 648 Depreciation 3274

@10%
Loss 58 Balance 12312 On new 250
machine

Depreciation and Amortization 531

 Sold for 13350 10,000 × 10 ÷
100 × 3 ÷ 12
Profit 1038 3524

7. Shobhit purchased a machinery on 1st January 2017 for `4,80,000 and spent
`20,000 on its installation. On July 1,2017 another machinery costing `2,00,000 was
purchased. On 1st July, 2018 the machinery purchased on Ist January, 2017 having
become scrapped and was sold for `2,90,000 and on the same date fresh machinery
was purchased for `5,00,000. Depreciation is provided annually on 31 st December at
the rate of 10% p.a. on written down value. Prepare Machinery A/c for the years 2017
and 2018. [Nov. 2019, 4 Marks]
Sol.
Machinery A/c

Date Particulars Amount ` Date Particulars Amount `

2017 2017
Jan 1 To Bank A/c(I) 4,80,000 31 Dec. By Depreciation
To Bank A/c 20,000 I 50,000
(I)- Installation charges II 10,000 60,000
July 1 To Bank A/c(II) 2,00,000 31 Dec. By Balance c/d
I 4,50,000
II 1,90,000 6,40,000
Total 7,00,000 Total 7,00,000

2018 2018
1 Jan. By Balance c/d 1 July By Depreciation (I) 22,500
I 4,50,000 By Bank A/c 2,90,000
II 1,90,000 6,40,000 By Profit & Loss 1,37,500
1 July To Bank A/c (III) 5,00,000 A/c(Loss)
31 Dec. By Depreciation
I 19,000 44,000
III 25,000
31 Dec. By Balance c/d
I 1.71.000 6,46,000
III 4.75.000
Total 11,40,000 Total 11,40,000

Working Note:
Format II (i.e. Direct Calculation - Pros: Time Effective, Cons: High Accuracy Needed)

I II III
Year Amount ` Year Amount ` Year Amount `
1 Jan. 2017 5,00,000 1 July. 2017 2,00,000 1 July 2018 5,00,000
31 Dec. 2017 -50,000 31 Dec. 2017 -10,000 31 Dec. 2018 -25,000

P
532 Accounting W
 1 Jan. 2018 4,50,000 1 Jan. 2018 1,90,000
1 July 2018 -22,500 31 Dec. 2018 -19,000
Sold 4,27,500 Balance 1,71,000 Balance 4,75,000
2,90,000
(Loss) 1,37,500

8. On 1st January, 2019 a firm purchased a Bus for `8,00,000. On 1st July, 2020 this
bus was damaged due to fire and was completely destroyed and `6,00,000 were received
by a cheque from the Insurance Company in full settlement on 1st October, 2020. On
1st July, 2020 another Bus was purchased by the firm for `10,00,000.

The firm charges Depreciation @ 20% per annum under the WDV Method. Calculate the
amount of depreciation for the year ended 31st March, 2021 and gain or loss on the
destroyed Bus. [Dec. 2021, 5 Marks]
Sol.
Calculation of Depreciation on Buses

(i) On 1st Bus `

Cost on 1.1.2019 8,00,000

Less: Depreciation @ 20% upto 31.3.2019 40,000
WDV as on 31.03.2019 or WDV as on 1.4.2019 7,60,000
Less: Depreciation @ 20% upto 31.3.2020 1,52,000
WDV as on 31.03.2020 or WDV as on 1.4.2020
6,08,000
Less: Depreciation @ 20% upto 1.7.2020 for 3 months
30,400
WDV as on 1.7.2020 on date of Accident 5,77,600
Claim Recd. from Insurance Company 6,00,000
Gain Due to Accident of Bus 22,400

Cost On 1st July, 2020 on New Bus 10,00,000

Less: Depreciation @ 20% for 9 months 1,50,000
WDV as on 31.3.2021 8,50,000

Total Depreciation for the year ended 31st March, 2021 = 30,400 + 1,50,000 i.e `1,80,400

9. Jain Bros. acquired a machine on 1st July, 2021 at a cost of `14,00,000 and spent
`1,00,000 on its installation. The firm writes off depreciation at 10% p.a. every year.
The books are closed on 31st December every year.
Required:
Show the Machinery A/c on diminishing balance method for the year 2021 and 2022.
 (ICAI Study Material)

Depreciation and Amortization 533

Sol. As per Reducing Balance Method
Machinery A/c

Date Particulars ` Date Particulars `

2021 2021
July 1 To Bank A/c 14,00,000 Dec. 31 By Depn. A/c 75,000
July 1 To Bank A/c - 1,00,000 (`15,00,000 x 10% x

Installation Expenses 6/12) for 6 months

Dec. 31 By Balance c/d 14,25,000

15,00,000 15,00,000
2022 2022
Jan. 1 To Balance b/d 14,25,000 Dec. 31 By Depn. A/c 1,42,500
(`14,25,000 x 10%)
Dec. 31 By Balance c/d 12,82,500
14,25,000 14,25,000

10. On 1.1.2020 machinery was purchased for `40,000. On 1.7.2021 addition were made
to the amount of `20,000. On 31.3.2022 machine purchased on 1.7.2021 costing
`6,000 was sold for `5,500 & on 30.6.2022 machinery purchased on 1.1.2020 costing
`16,000 was sold for `13,350. On 1.10.2022 addition were made to the amount of
`10,000.
Show Machinery A/c & Depreciation A/c for 3 years 2020, 2021, 2022. Depreciate
Machinery at 10% p.a. by S.L.M.
Sol.
Machinery A/c (SLM 10%)

Date Particulars ` Date Particular `

1.1.2020 To Bank A/c 40,000 31.12.2020 By Depn. A/c 4,000
By Balance c/d 36,000
40,000 40,000
1.1.2021 To Balance b/d 36,000 31.12.2021 By Depn. A/c 5,000
(4000 + 1000)
1.7.2021 To Bank A/c 20,000 By Balance c/d 51,000
56,000 56,000
1.1.2022 To Balance b/d 51,000 31.3.2022 By Bank A/c 5,500
30.6.2022 To Profit on sale of 1,350 By Depn. A/c 150
Machinery A/c By Loss on sale of 50
1.10.2022 To Bank A/c 10,000 Machinery A/c
30.6.2022 By Bank A/c 13,350
By Depn. A/c 800

P
534 Accounting W
 By Depn. A/c 4050
(3800 + 250)
By Balance c/d 38,450
62,350 62,350

Depreciation A/c

Date Particulars ` Date Particulars `

31.12.2020 To Machinery A/c 4,000 31.12.2020 By P&L A/c 4,000
4,000 4,000
31.12.2021 To Machinery A/c 5,000 31.12.2021 By P&L A/c 5,000
5,000 5,000
31.3.2022 To Machinery A/c 150 21.3.2022 By P&L A/c 5,000
30.6.2022 To Machinery A/c 800
31.12.2022 To Machinery A/c 4,050
5,000 5,000

Working notes

(1) Sold on 31.3.2022 (2) Sold on 30.6 .2022

1.7.2021 Cost 6,000 1.1.2020 Cost 16000
31.12.2021 Depreciation 300 31.12.2020 Depreciation 1600
1.1.2022 Balance 5,700 1.1.2021 Balance 14400
31.3.2022 Depreciation 150 31.12.2021 Depreciation 1600
31.3.2022 Balance 5,550 1.1.2022 Balance 12800
Sold’ for 5,500 30.6.2022 Depreciation 800
Loss 50 Balance 12000
Sold for 13350
Profit 1350

(3) Deprecation on 31.12.2022

Original cost of remaining old machine
40,000 - 16,000 = 24,000
20,000 - 6,000 = 14,000
38,000
Depreciation @10% 3,800
One new machine
10,000 × 10 ÷ 100 × 3 ÷ 12  250
4050

Depreciation and Amortization 535

11. On 1st January, 2020 Shankar purchased 6 machines for `7500 each. His Accounting
year ends on 31st December. Depreciation at the rate of 10% on initial cost has been
charged to profit and loss A/c and credited to a separate depreciation provision A/c.
On 1st January, 2021 one machine was sold for `6,250 and on 1st January, 2022
a second machine was sold for `6,250. An improved model which cost `14,000 was
purchased on 1st July, 2021. The same rate of depreciation was decided for the new
machine was well. You are required to show:
1. The asset A/c
2. The asset disposal A/c
3. The depreciation provision A/c.
Sol.

Ledger of Shankar
Dr. Machinery A/c Cr.

Date Particulars ` Date Particulars `

2020 To Bank A/c 45,000 2020 By Balance c/d 45,000
Jan 1 45,000 Dec. 31 45,000

2021 To Balance b/d 45,000 2021 By Machinery disposal A/c 7,500

Jan 1 To Bank A/c 14,000 Jan. 1 By Balance c/d 51,500
July 1 59,000 Dec. 31 59,000

2022 To Balance b/d 51,500 2022 By Machinery disposal A/c 7,500

Jan 1 Jan. 1 By Balance c/d 44,000
51,500 Dec. 31 51,500

Note: The balance in the asset A/c at any time represents the cost of assets retained by the firm.

Machinery Disposal A/c

Date Particulars ` 2021 Particulars `

2021 To Machinery A/c 7,500 2021 By provision for Depn. A/c 750
Jan. 1 Jan. 31 By Bank A/c 6,250
Jan. 1 By Profit and loss A/c (loss) 500
7,500 7,500
` `
2022 To Machinery A/c 7,500 2022 By Provision for Depn. A/c 1,500
Jan. 1 To P&L A/c (profit) 250 Jan. 1 By Bank A/c 6,250
7,750 Jan. 1 7,750

P
536 Accounting W
Note: Machinery disposal A/c is not a continuous A/c like machinery A/c. It must be prepared
separately for each year.

Dr. Provision for Depreciation A/c (SLM 10%) Cr.

Date Particulars ` Date Particulars `

2020 To Balance c/d 4,500 2020 By Depn. A/c 4,500
Dec. 1 4,500 Dec. 31 4,500

2021 To Machinery disposal 750 2021 By Balance b/d 4,500

Jan 1 A/c (transfer) Jan. 1
To Balance c/d 8,200 By Depn. A/c 4,450
Jan 1 Dec. 31 (3750 + 700)
8,950 8,950

2022 To Machinery disposal 1,500 2022 By Balance b/d 8,200

A/c transfer
Jan 1 Jan. 1 By Depn. A/c 4,400
To Balance c/d (3000 + 1400)
11,100 Dec. 31
Dec. 31
12,600 12,600

Note: The balance in the provision A/c at any time shows the balance of accumulated depreciation
in respect of retained assets.

`
Depreciation for 2021
(1) On `37,500 (`45,000 – `7,500) @ 10% per annum 3,750
On `14,000 @ 10% p.a. for 6 months 700

Depreciation for the year 2022 4,450

(2) On `30,000 (`37,500 – `7,500) @ 10% p.a.
On `14,000 @ 10% p.a. for one year 3,000
1,400
4,400

12. A firm purchased on 1st January, 2020 certain machinery for `5,82,000 and spent
`18,000 on its erection. On July 1, 2020 another machinery for `2,00,000 was acquired. On
1st July, 2021 the machinery purchased on 1st January, 2020 having become obsolete was
auctioned for `3,86,000 and on the same date fresh machinery was purchased at a cost of
`4,00,000.
Depreciation was provided for annually on 31st December at the rate of 10 per cent

p.a. on written down value.

Required Prepare machinery A/c.

(ICAI Study Material)
Sol.
Machinery A/c

Depreciation and Amortization 537

Date Particulars Amount ` Date Particulars Amount `
2020 2020
Jan. 1 To Bank A/c 5,82,000 Dec. 31 By Depn. A/c 70,000
Jan. 1 To Bank A/c – erection 18,000 By Balance c/d 7,30,000
charges
July 1 To Bank A/c 2,00,000
8,00,000 8,00,000
2021 2021
Jan. 1 To Balance b/d 7,30,000 July 1 By Depn. on
July 1 To Bank A/c 4,00,000 sold machine 27,000
By Bank A/c 3,86,000
By Profit and Loss A/c 1,27,000
Dec. 31 By Depn. A/c 39,000
By Balance c/d 5,51,000
11,30,000 11,30,000

Working Note:-
Book Value of Machines

Machine I Machine II Machine III

` ` `
Cost 6,00,000 2,00,000 4,00,000
Depreciation for 2020 (60,000) (10,000)
Written down value 5,40,000 1,90,000
Depreciation for 2021 (27,000) (19,000) (20,000)
Written down value 5,13,000 1,71,000 3,80,000
Sale Proceeds (3,86,000)
Loss on Sale 1,27,000

13. A machine of cost `12,00,000 is depreciated straight-line assuming 10 year working

life and zero residual value for three years. At the end of third year, the machine was
revalued upwards by `60,000 the remaining useful life was reassessed at 9 years.
 (ICAI Study Material)
Required:

Calculate depreciation for the fourth year.
Sol. Depreciation per year charged for three years = `12,00,000 / 10 = `1,20,000
WDV of the machine at the end of third year = `12,00,000 – `1,20,000 × 3 = `8,40,000.
Depreciable amount after revaluation = `8,40,000 + `60,000 = `9,00,000
Remaining useful life as per previous estimate = 7 years Remaining useful life as per revised
estimate = 9 years
Depreciation for the fourth year onwards = `9,00,000 / 9 = `1,00,000.
P
538 Accounting W
14. M/s Akash & Co. purchased a machine for `10,00,000. Estimated useful life and scrap
value were 10 years and `1,20,000 respectively. The machine was put to use on 1.1.2017.
Required:

Show Machinery A/c and Depreciation A/c in their books for 2022 by using sum of
years digits method. (ICAI Study Material)
Sol.
In the books of M/s Raj & Co.
Machinery A/c
Date Particulars Amount ` Date Particulars Amount `
2022 2022
Jan. 1 To Balance b/d (w.n.2) 3,60,000 Dec. 31 By Depn. A/c (w.n.3) 80,000

Dec. 31 By Balance c/d 2,80,000

3,60,000 3,60,000
2023
Jan. 1 To Balance b/d 2,80,000

Depreciation A/c

Date Particular ` Date Particular `

2022 2022
Dec. 31 To Machinery A/c 80,000 Dec. 31 By Profit and Loss A/c 80,000

80,000 80,000

15. A Machine costing `6,00,000 is depreciated on straight line basis, assuming 10 years
working life and Nil residual value, for three years. The estimate of remaining useful life
after third year was reassessed at 5 years.
Required:

Calculate depreciation for the fourth year.
Sol. Depreciation per year = `6,00,000 / 10 = `60,000
Depreciation on SLM charged for three years = `60,000 x 3 years = `1,80,000
Book value of the computer at the end of third year = `6,00,000 – `1,80,000 = `4,20,000.
Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards = `4,20,000 / 5 = `84,000 per annum
16. A Machinery costing `10,00,000 is depreciated on straight line assuming 10 year
working life and zero residual value, for four years. At the end of the fourth year, the
machinery was revalued upwards by `40,000. The remaining useful life was reassessed
at 8 years. Calculate Depreciation for the fifth year. [Nov. 2018, 4 Marks]

Depreciation and Amortization 539

Sol.

Depreciation per year = 10, 00, 000 = `1,00,000

10
Value of plant & Machinery = 10,00,000
Less: Depreciation for 4 years (1,00,000 × 4) = 4,00,000
WDV of the machine at the end of 4 th year = 6,00,000
Add: Upward Revaluation = 40,000
Depreciable amount after revaluation = 6,40,000
Remaining useful life as per revised estimate = 8 years
= `80,000
Depreciation for the fifth year onwards = 6, 40, 000
8

17. Jain Bros. acquired a machine on 1st July, 2021 at a cost of `14,00,000 and spent
`1,00,000 on its installation. The firm writes off depreciation at 10% p.a. of the original
cost every year. The books are closed on 31st December every year.
Required:

Show the Machinery A/c and Depreciation A/c for the year 2021 and 2022.
 (ICAI Study Material)
Machinery A/c

Date Particulars ` Date Particulars `

2021 2021
July 1 To Bank A/c 14,00,000 Dec. 31 By Depn. A/c 75,000
July 1 To Bank A/c - 1,00,000 10% for 6months SLM
Installation

Dec. 31 By Balance c/d 14,25,000

15,00,000 15,00,000
2022 2022
Jan. 1 14,25,000 Dec. 31 By Depn. A/c 1,50,000
To Balance b/d
10% for 12 months SLM
Dec. 31 12,75,000
By Balance c/d
14,25,000 14,25,000

Depreciation A/c

Date Particulars ` Date Particulars `

2021 2021

Dec. 31 To Machinery A/c 75,000 Dec. 31 By Profit & Loss A/c 75,000

2022 2022

Dec. 31 To Machinery A/c 1,50,000 Dec. 31 By Profit & Loss A/c 1,50,000

P
540 Accounting W
18. A machine is purchased for `20,00,000. Its estimated useful life is 10 years with a
residual value of `2,00,000. The machine is expected to produce 1.5 lakh units during
its life time. Expected distribution pattern of production is as follows:
Year Production
1-3 20,000 units per year
4-7 15,000 units per year
8-10 10,000 units per year
Required:

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

 (ICAI Study Material)

Sol. Statement showing Depreciation under Production Units Method

Year Annual Depreciation

1-3 20, 000

× (`20,00,000 - `2,00,000) = `2,40,000
1, 50, 000

15, 000
4-7 × (`20,00,000 - `2,00,000 ) = `1,80,000
1, 50, 000

8-10 10, 000

× (`20,00,000 - `2,00,000) = `1,20,000
1, 50, 000

19. A Machinery costing `20,00,000 is depreciated on straight line assuming 10 years

working life and nil salvage value for four years. At the end of the fourth year, the
machinery was revalued upwards by `80,000. The remaining useful life of the machinery
was also reassessed as 8 years at the end of the fourth year. Calculate the depreciation
for 5th Year. (ICAI Study Material)
Sol. Depreciation every year for first 4 years = `20,00,000 / 10 = `2,00,000
Thus, Written Down Value of the Machinery at end of the 4th year = `20,00,000
– (`2,00,000 x 4) = `12,00,000
Revalued Amount i.e. New Depreciable Amount shall be = `12,00,000 + `80,000 = `12,80,000
Original remining useful life is (10-4) = 6 Years whereas it is reassessed as 8 Years. Hence,
depreciation for 5th Year = `12,80,000 / 8 = `1,60,000

20. M/s Surya & Co. took lease of a quarry on 1-1-2019 for `1,00,00,000. 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:

Depreciation and Amortization 541

 Year Quantity of Mineral extracted
2019 2,000 tonnes
2020 10,000 tonnes
2021 15,000 tonnes
Required:

Show the Quarry Lease A/c and Depreciation A/c for each year from 2019 to 2021.
 (ICAI Study Material)
Sol.
Quarry Lease A/c

Date ` `

2019 2019
Jan. To Bank A/c 1,00,00,000 Dec. 31 By Depn. A/c 1,00,000
[(2,000/2,00,000) ×
`1,00,00,000]
Dec. 31 By Balance c/d 99,00,000
1,00,00,000 1,00,00,000
2020 2020
Jan. 1 To Balance b/d 99,00,000 Dec. 31 By Depn. A/c 5,00,000
Dec. 31 By Balance c/d 94,00,000
99,00,000 99,00,000
2021 2021
Jan. 1 To Balance b/d 94,00,000 Dec. 31 By Depn. A/c 7,50,000
Dec. 31 By Balance c/d 86,50,000
94,00,000 94,00,000

Depreciation A/c

Date ` `

2019 2019
Dec. 31 To Quarry lease A/c 1,00,000 Dec. 31 By Profit & Loss A/c 1,00,000

1,00,000 1,00,000
2020 2020
Dec. 31 To Quarry lease A/c 5,00,000 Dec. 31 By Profit & Loss A/c 5,00,000
5,00,000 5,00,000

2021 2021
Dec. 31 To Quarry lease A/c 7,50,000 Dec. 31 By Profit & Loss A/c 7,50,000

7,50,000 7,50,000

P
542 Accounting W
21. M/s Anshul & Co. commenced business on 1st January 2017, when they purchased
plant and equipment for `7,00,000. They adopted a policy of charging depreciation
at 15% per annum on diminishing balance basis and over the years, their purchases of
plant have been:
On 1-1-2021 it was decided to change the method and rate of depreciation to straight
line basis. On this date remaining useful life was assessed as 6 years for all the assets
purchased before 1.1.2021 with no scrap value and 10 years for the asset purchased
on 1.1.2021.
Required:

Calculate the difference in depreciation to be adjusted in the Plant and Equipment A/c
for the year ending 31st December, 2021. (ICAI Study Material)
Sol.
Depreciation on WDV method

Purchased on Purchased on Total

Jan. 1, 2017 Jan. 1, 2018 Depreciation
` ` `
2017 Cost 7,00,000
Depn. (1,05,000) 1,05,000
Written Down Value (WDV) 5,95,000
2018 Cost - 1,50,000
Depn. (89,250) (22,500) 1,11,750
W.D.V. 5,05,750 1,27,500
2019
Depn. (75,863) (19,125) 94,988
W.D.V. 4,29,887 1,08,375
2020
Depn. (64,483) (16,256) 80,739
W.D.V. 3,65,404 92,119
2021
Depn. (60,900) (15,353) 76,253
3,04,504 76,766

Plant and Equipment A/c

Date ` `
2021 2021
Jan. 1 To Balance b/d 4,57,523 Dec. 31 By Depn. 96,253

Depreciation and Amortization 543

 To Bank 2,00,000 (60,900 + 15,353 +
20,000)
By Balance c/d 5,61,270
6,57,523 6,57,523
2022
Jan. 1 To Balance b/d 5,61,270

22. On 1.1. 2020 Plant was purchased for `40, 000. On 1.7. 2021 addition were
made to the amount of `20,000. On 31.3.2022 Plant purchased on 1.7.2021
costing `6, 000 was sold for `5,500 & on 30.6. 2022 Plant purchased on
1.1 .2020 costing `16,000 was sold for `13,350. On 1.10 .2022 addition were made
to the amount of `10,000.
Show Plant A/c & Depreciation A/c for 3 years 2020, 2021, 2022. Depreciate Plant
at 10 % p.a. by W.D.V. method
Sol.
Plant A/c (W.D.V. 10%)

Date Particular ` Date Particular `

1.1.2020 To Bank A/c 40,000 31.12.2020 By Depn. A/c 4000
By Balance c/d 36000
40,000 40,000
1.1.2021 To Balance b/d 36000 31.12.2021 By Depn. A/c 4600
1.7.2021 To Bank A/c 20000 By Balance c/d 51,400
56,000 56,000
1.1.2022 To Balance b/d 51,400 31.3.2022 By Bank A/c 5,500
By Depn. A/c 142
By Loss on sale of 58
Machinery
30.6.2022 To Profit on sale of 1038 306.2022 By Bank A/c 13,350
machinery
1.10.2022 To Bank A/c 10,000 By Depn. A/c 648
By Depn./c 3524
(3274 + 250)
By Balance c/d 39,216
62,438 62,438

Depreciation A/c

Date Particular ` Date Particular `

31.12 .2020 To Plant A/c 4,000 31.12 .2020 By P & L A/c 4,000
4,000 4,000

P
544 Accounting W
Date Particular ` Date Particular `
31.12.2021 To Plant A/c 4,600 31.12.2021 By P & L A/c 4,600
4,600 4,600
31.3.2022 To Plant A/c 142 31.12.2022 By P & L A/c 4314
30.6.2022 To Plant A/c 648
31.12 .2022 To Plant A/c 3524
4314 4314

Working notes

(1) Sold on 31.3.2022 (2) Sold on 30.6.2022 (3) Deprecation on 31.12.2022

1.7.2021 Cost 6000 1.1.2020 Cost 16000 Balance of old machine 51400
on 1.1.2022

31.12.2021 Depreciation 300 31.12.2020 Depreciation 1600 (-) sold 5700

1.1.2022 Balance 5700 1.1.2021 Balance 14400 (-)sold 12960

31.3.2022 Depreciation 142 31.12.2021 Depreciation 1440 Balance 32740

31.3.2022 Balance 5,558 1.1.2022 Balance 12960 Depreciation @10% 3274

Sold’ for 5,500 30.6.2022 Depreciation 648 On new machine

10,000 × 10 ÷ 100 × 3 250
Loss 58 Balance 12312
÷ 12

Sold for 13350

Profit 1038 3524

23. A purchased on 1st January, 2020 certain machinery for `97,000 and spent `3,000 on
its erection. On 1st July, 2020 additional machinery costing `50,000 was purchased. On
Ist July, 2022 the machinery purchased on 1st January, 2020 having become obsolete
was auctioned for `50,000 and on the same date new machinery was purchased at
a cost of `75,000. Depreciation was provided for annually on 31st December at the
rate of 10% per annum on the original cost of the machinery. No depreciation need be
provided when a machinery is sold or auctioned, for that part of the year in which sale
or auction took place. But for the above, depreciation shall be provided on time basis.
In 2023, however, A changed this method of providing depreciation and adopted the
method of writing off 15% p.a. on the written down value on the balance as appeared
in machinery A/c on 1-1-2023.
Show the machinery A/c for the calendar years 2020 to 2023.

Depreciation and Amortization 545

Sol.
Date Particulars ` Date Particulars `
2020 2020
Jan 1 To Bank A/c 97,000 Dec 31 By Depn. A/c 12,500
To Bank A/c - 3,000 (10000 + 2500)
erection By Balance c/d 1,37,500
July 1 To Bank A/c 50,000
1,50,000 1,50,000

2021 2021
Jan 1 To Balance b/d 1,37,500 Dec 31 By Depn. A/c 15,000
(10000 + 5000)
By Balance c/d 1,22,500
1,37,500 1,37,500
2022 2022
Jan 1 To Balance b/d 1,22,500 July 1 By Bank A/c 50,000
July 1 To Bank A/c 75,000 By P & L A/c 25,000
(loss on sale machine)
By Depn. A/c 5,000
(on asset sold)
Dec 31 By Depn. A/c 8,750
(5000 + 3750)
By Balance c/d 1,08,750

1,97,500 1,97,500
2023 2023
Jan 1 To Balance b/d 1,08,750 Dec 31 By Depn. A/c 16,312
(15% of 108750)
By Balance c/d 92,438
1,08,750 1,08,750

New method to be applied on the balance appearing as on 1.1.2023, as prospective change.

24. On April 1, 2019 Shubra Ltd. purchased a machinery for `12,00,000. On Oct 1, 2021,
a part of the machinery purchased on April 1, 2019 for `80,000 was sold for `45,000
and a new machinery at a cost of `1,58,000 was purchased and installed on the same
date. The company has adopted the method of providing 10% p.a. depreciation on the
written down value of the machinery.
Required: Show the necessary ledger A/cs for the years ended 31st March, 2020 to

2022 assuming that (a) ‘Provision for Depreciation A/c’ is not maintained (b) Provision
for Depreciation A/c is maintained. (ICAI Study Material)

P
546 Accounting W
Sol. (a) If ‘Provision for Depreciation A/c’ is not maintained.

Dr. Machinery A/c Cr.

Date Particulars Amount ` Date Particulars Amount `

01.04.2019 To Bank A/c 12,00,000 31.03.2020 By Depn. A/c 1,20,000

By Balance c/d 10,80,000
12,00,000 12,00,000
01.04.2020 To Balance b/d 10,80,000 31.03.2021 By Depn. A/c 1,08,000
By Balance c/d 9,72,000
10,80,000 10,80,000
01.04.2021 To Balance b/d 9,72,000 01.10.2021 By bank A/c 45,000
01.10.2021 To Bank A/c 1,58,000 By Profit & Loss 16,560
A/c
By Depn. A/c 3,240
31.3.2021 By Depn. A/c 98,620
(7,900 + 90,720)
By Balance c/d 9,66,580
(8,16,480 +
1,50,100)
11,30,000 11,30,000

(b) If ‘Provision for Depreciation A/c’ is maintained

Dr. Machinery A/c (at original cost) Cr.

Date Particulars ` Date Particulars `

01.04.2019 To Bank A/c 12,00,000 31.03.2020 By Balance c/d 12,00,000

01.04.2020 To Balance b/d 12,00,000 31.03.2021 By Balance c/d 12,00,000

01.04.2021 To Balance b/d 12,00,000 01.10.2021 By Machinery 80,000

Disposal A/c

01.10.2021 To Bank A/c 1,58,000 31.03.2022 By Balance c/d 12,78,000

13,58,000 13,58,000

Dr. Provision for Depreciation A/c Cr.

Date Particulars ` Date Particulars `

31.03.2020 To Balance c/d 1,20,000 31.03.2020 By Depn. A/c 1,20,000

31.03.2021 To Balance c/d 2,28,000 1.04.2020 By Balance b/d 1,20,000

31.03.2021 By Depn. A/c 1,08,000

2,28,000 2,28,000

Depreciation and Amortization 547

 01.10.2021 To Machinery 18,440 01.04.2021 By Balance b/d 2,28,000
Disposal A/c
31.03.2022 To Balance c/d 3,11,420 01.10.2021 By Depn. A/c 3,240

31.03.2022 By Depn. A/c 98,620

3,29,860 3,29,860

Dr. Machinery Disposal A/c Cr.

Date Particulars ` Date Particulars `

01.10.2021 To Machinery 80,000 01.10.2021 By Provision for 18,440

Disposal A/c Depn. A/c
By Bank A/c 45,000

By Profit and Loss 16,560

A/c
80,000 80,000

Working Notes:
(1) Calculation of Profit/Loss on Sale of Machinery

Particulars `
A. Original Cost 80,000

B. Less: Depreciation @ 10% WDV p.a. for 2 ½ years 18,440

C. Book Value as on date of Sale (A – B) 61,560

D. Less: Sale proceeds 45,000

E. Loss: on Sale (C – D) 16,560

(2) Calculation of Depreciation for Current Year on Machines (other than sold)

Particulars `

A. On Old Machines of `9,07,200 for 1 year (10% WDV) 90,720

B. On New Machine of `1,58,000 for ½ year 7,900

98,620

25. Kumar R&D Co. registered a patent (the patent meets the criteria of an intangible asset)
on 1st July, 2021 developed at a cost of `28,00,000 and spent `2,00,000 towards
legal fees and registration. The patent is granted for a period of 10 years. The books
are closed on 31st December every year.
Required:

Show the Patent A/c and Amortisation A/c for the year 2021 and 2022.
 (ICAI Study Material)

P
548 Accounting W
Sol. Useful Life: 10 years from 1 July, 2021 Residual Value: NIL
Value of patent will be= `30,00,000 (`28,00,000 + `2,00,000 )
Therefore, annual depreciation: `30,00,000 ÷ 10 years = `3,00,000
Patent A/c

Date Particular ` Date Particular `

2021 2021

July 1 To Bank A/c 28,00,000 Dec. 31 By Amortisation A/c: 1,50,000

July 1 To Bank A/c - Legal & 2,00,000 `3,00,000 x 6/12

Reg. Exp. Dec. 31 By Balance c/d 28,50,000

30,00,000 30,00,000

2022 2022

Jan. 1 To Balance b/d 28,50,000 Dec. 31 By Amortisation A/c 3,00,000

Dec. 31 By Balance c/d 25,50,000

28,50,000 28,50,000

Amortisation A/c

Date Particular Amount ` Date Particular Amount `

2021 2021

Dec. 31 To Patent A/c 1,50,000 Dec. 31 By Profit & Loss A/c 1,50,000
2022 2022

Dec. 31 To Patent A/c 3,00,000 Dec. 31 By Profit & Loss A/c 3,00,000

26. Amazing group had Property, Plant & Equipment (PP&E) with a book value of
`35,00,000 on 31st December, 2022. The balance in Revaluation Surplus on that
date was `3,00,000. As part of their practice of revaluing the assets on yearly basis,
another revaluation was carried out on 31st December, 2022. Evaluate the impact of
Revaluation if the Fair Value as a result of Revaluation done on 31st December, 2022
was (a) `37,00,000 (b) `33,00,000 and (c) `31,00,000. Also, give the journal entries.
 (ICAI Study Material)
Sol. (a) Fair Value: `37,00,000
Given that this represents an upward revaluation and the group previously experienced an
increase in revaluation surplus (indicating a prior upward adjustment), it will lead to an
additional credit of 2,00,000 to the Revaluation Surplus A/c. Consequently, the cumulative
balance of Revaluation Surplus (an element of other comprehensive income within Equity)
will rise to 5,00,000. Here’s the corresponding Accounting journal entry:

Property, Plant & Equipment A/c Dr 2,00,000

To Revaluation Surplus A/c 2,00,000

Depreciation and Amortization 549

 (b) Fair Value: `33,00,000
As this involves a downward revaluation, and the group previously had a balance in the
revaluation surplus (indicating a prior upward adjustment), this will result in a reduction or
a debit to the Revaluation Surplus A/c equal to the existing balance. Any remaining excess
will be debited to the Profit & Loss A/c. In this particular instance, there is a decrease in
fair value amounting to `2,00,000 (35,00,000 - 33,00,000), and this entire sum will be
debited to the Revaluation Surplus A/c. Consequently, the total balance of Revaluation Surplus
(a component of other comprehensive income within Equity) will decrease to `1,00,000.
Here’s the corresponding Accounting journal entry:

Revaluation Surplus A/c Dr. 2,00,000

To Property, Plant & Equipment A/c 2,00,000

(c) Fair Value: `31,00,000

Given that this also involves a downward revaluation, and the group previously held a
balance in the revaluation surplus (indicating a prior upward adjustment), this will lead to a
reduction or a debit to the Revaluation Surplus A/c up to the amount of the existing balance.
Any excess will be debited to the Profit & Loss A/c. In this scenario, there is a decrease in
fair value of `4,00,000 (35,00,000 - 31,00,000), resulting in a debit of `3,00,000 to
the Revaluation Surplus A/c, and the remaining `1,00,000 will be debited to the Profit &
Loss A/c. Consequently, the total balance of the Revaluation Surplus (a component of other
comprehensive income in Equity) will be reduced to zero. Here’s the corresponding Accounting
journal entry:

Revaluation Surplus A/c Dr. 3,00,000

Profit & Loss A/c Dr. 1,00,000

To Property, Plant & Equipment A/c 4,00,000

27. The balance of Machinery A/c of a company on 1st April, 2020 was `28,54,000.
Out of this, a plant having book value of `2,16,000 as on 1st April, 2020 was
sold on 1st July, 2020 for `82,000. On the same date a new plant was purchased
for `4,58,000 and `22,000 was spent on its erection. On 1st November, 2020 a
new machine was purchased for `5,60,000. Depreciation is Written off @ 15% per
annum under the diminishing balance method. Calculate the total amount debited
to depreciation for the year ended 31st March, 2021. [July 2021, 4 Marks]
Sol.
Calculation of Depreciation for the year ended 31st March, 2021:

Particulars Amount `
Depreciation on:
1. Opening Balance (1.4.2020)
8,100
 15 3 
(a) Machine Sold 1.7.2020  2, 16, 000 × 
 100 12 

15 3,95,700
(b) Other Machine (28,54,000-2,16,000) ×
100
P
550 Accounting W
 2. Machine Purchased on 1.7.2020
15 9 54,000
(4,58,000 + 22,000) × ×
100 12
3. Machine Purchased on 1.11.2020
15 5 35,000
5,60,000 × ×
100 12
Total Depreciation for the year 4,92,800

28. A machine was purchased for `30,00,000 having an estimated total working of 24,000
hours. The scrap value is expected to be `2,00,000 and anticipated pattern of distribution
of effective hours is as follows :
Year
1 – 3 3,000 hours per year
4 - 6 2,600 hours per year
7 - 10 1,800 hours per year
Required:

Determine Annual Depreciation under Machine Hour Rate Method.
 (ICAI Study Material)
Sol. Statement of Annual Depreciation under Machine Hours Rate Method

Year Annual Depreciation

1 - 3 3, 000
× (`30,00,000 - `2,00,000) = `3,50,000
24, 000

4 - 6 2, 600
× (`30,00,000 - `2,00,000) = `3,03,333
24, 000

7 - 10 1,800 × (`30,00,000 - `2,00,000) = `2,10,000

24, 000

29. Cost of Machine = `40,000

Scrap Value = `4,000
Estimated life = 5 years
Calculate depreciation of all the years on the basis of Sum of Years of Digits Method.

Sol.
Number of years (including the present
year) of remaining life of the asset
Depreciation of the Year = Depreciable value ×
Number of years (including the present
year) of remaining life of the asset

Depreciation and Amortization 551

 5 5
1st Year depreciation = (40,000 - 4,000) × = 36,000 × = `12,000
1+2+3+4+5 15
4
2nd Year depreciation = 36,000 × = `9,600
15
3
3rd Year depreciation = 36,000 × = `7,200
15
2
4th Year depreciation = 36,000 × = `4,800
15
1
5th Year depreciation = 36,000 × = `2,400
15

30. On April 1, 2019 a firm purchased a machinery for `2,00,000. On 1st October in the
same Accounting year, additional machinery costing `1,00,000 was purchased. On 1st
October, 2020, the machinery purchased on 1st April 2019, having become obsolete
was sold off for `90,000. On October 1, 2021, new machinery was purchased for

`2,50,000 while the machinery purchased on 1st October 2019 was sold for `85,000
on the same day. The firm provides depreciation on its machinery @ 10% per annum on
original cost on 31st March every year. Show Machinery A/c, Provision for Depreciation
A/c and Depreciation A/c for the period of three Accounting years ending March 31,
2022. (ICAI Study Material)
Sol.

Dr. Machinery A/c Cr.

Date Particulars ` Date Particulars `

01.04.2019 To Bank A/c To 2,00,000 31.03.2020 By Balance c/d 3,00,000
01.10.2019 Bank A/c 1,00,000

3,00,000 3,00,000
01.04.2020 To Balance b/d 3,00,000 01.10.2020 By Bank A/c 90,000
By Provision for 30,000
Depn. A/c
By Profit and Loss 80,000
A/c
31.3.2021 By Balance c/d 1,00,000
3,00,000 3,00,000
01.04.2021 To Balance b/d 1,00,000 01.10.2021 By Bank A/c 85,000
01.10.2021 To Bank A/c 2,50,000 By Provision for 20,000
Depn. A/c
To Profit and Loss 5,000 31.3.2022 By Balance c/d 2,50,000
A/c
3,55,000 3,55,000

P
552 Accounting W
 Depreciation A/c

Date Particulars ` Date Particulars `

31.03.2020 To provision for 25,000 31.03.2020 By Profit and Loss 25,000
Depn. A/c A/c
25,000 25,000
01.10.2020 To Provision for 10,000 31.03.2021 By Profit and Loss 20,000
Depn. A/c A/c
31.03.2021 To Provision for 10,000
Depn. A/c
20,000 20,000
01.10.2021 To Provision for 5,000 31.03.2022 By Profit and Loss 17,500
Depn. A/c A/c
31.03.2022 To Provision for 12,500
Depn. A/c
17,500 17,500

Dr. Provision for Depreciation A/c Cr.

Date Particulars ` Date Particulars `

31.03.2020 To Balance c/d 25,000 31.03.2020 By Depn. A/c 25,000

(`20,000 + `5,000)
25,000 25,000
01.12.2020 To Machinery A/c 30,000 01.04.2020 By Balance b/d 25,000
(`20,000 + `10,000) 01.10.2020 By Depn. A/c 10,000
31.03.2021 To Balance c/d 15,000 31.03.2021 By Depn. A/c 10,000
45,000 45,000
01.10.2021 To Machinery A/c 20,000 01.04.2021 By Balance b/d 15,000
(`5,000 + `10,000 01.10.2021 By Depn. A/c 5,000
+ `5,000) 31.03.2022 By Depn. A/c 12,500
31.03.2022 To Balance c/d 12,500
32,500 32,500

31. The Machinery A/c of a firm showed a balance of `95 Lakhs on 1st April, 2020. The
Books of A/c of the firm are closed on 31st March every year and Depreciation is written
off @ 10% per annum under the Diminishing Balance Method. On Ist September, 2020
a new machine was acquired at a cost of `14 Lakhs and `44,600 was incurred on the
same day as installation charges for erecting the machine. On 1st September, 2020
a machine which had cost `21,87,000 on 1st April, 2018 was sold for `3,75,000.
Another machine which had cost `21,85,000 on 1st April, 2019 was scrapped on
1st September, 2020 and it realized nothing.
Prepare the Plant and Machinery A/c for the year ended 31st March, 2021. Allow
the same rate of depreciation as in the past and calculate depreciation to the nearest
multiple of a rupee. Also show all the necessary working notes.[June 2022, 10 Marks]
Depreciation and Amortization 553
Sol.
Plant and Machinery A/c (1st April 2020 to 31st March 2021)

Date Particulars Amount Date Particulars Amount

2020 2020
1 April To Balance b/d :- 1 Sept. By Depn. on:
M1- WDV 1771470 Machinery 1- 73811
M2- WDV 1966500 Machinery 2- 81938 1,55,749
Bal.- WDV 5762030 95,00,000 By Bank A/c (Sale M1) 3,75,000
By P&L A/c (Loss M1) 13,22,659
1 Sept. To Bank A/c (New By P&L A/c (Loss M2) 18,84,562
Machine)
Cost- 14,00,000 2021
Installation- 44,600 14,44,600 31 Mar. By Depn. On :
Op. Unsold- 576203
New Machine- 84268 6,60,471
By Balance c/d
Op. Unsold - 5185827
New Machine- 1360332 65,46,159
Total 1,09,44,600 Total 1,09,44,600

Working Note:-

Machinery 1 `

Cost as on 1.4.2018 21,87,000

- Depreciation @ 10% (2,18,700)
W.D.V. as on 31.3.2019 19,68,300
- Depreciation @ 10% (1,96,830)
W.D.V. as on 31.3.2020 17,71,470
Cost as on 1.4.2019 21,85,000
Depreciation @ 10% (2,18,500)
W.D.V. as on 31.3.2020 19,66,500

32. Mr.Bhuvan purchased a Plant costing `30,000 on 1st January, 2020. He purchased
another Plant for `25,000 on 1st July in the same year. On 1st October 2021, he sold
1/3rd part of 1st Plant for `5,500 and purchased another Plant for `15,000 on the
same date. Prepare Plant A/c for three years in the following cases:
Case I- If rate of depreciation is 10% p.a. on SLM
Case II- If rate of depreciation is 10% p.a. on WDV

P
554 Accounting W
Sol. Case I:-
Working Note:

Plant-I Plant-II Plant-III

On Jan .1, 2020 30,000 On July 1, 2020 25,000 On Oct 1, 2021 15,000
Part I Less: Dep. 1,250 Less: Dep. for 3M 375
COA 30,000 × 1/3 = 10,000 Balance as on 31/12/20 23,750 Balance as on 31/12/21 14,625

Less: Dep. 1,000 Less: Dep. 2,500 Less: Dep. 1,500

Balance as on 31/12/22 13,125
Balance as on 31/12/20 9,000 Balance as on 31/12/21 21,250
Less: Dep. for 9M 750 Less: Dep. 2,500
Balance on date of sale 8,250 Balance as on 31/12/22 18,750

Sale Value 5,500

Loss:2,750

Part II
COA 30,000 × 2/3= 20,000
Less: Dep. 2,000
Balance as on 31/12/20 18,000
Less: Dep. 2,000
Balance as on 31/12/21 16,000
Less: Dep. 2,000
Balance as on 31/12/22 14,000

Plant A/c

Date Particulars L.F. Amount Date Particulars L.F. Amount

2020 2020
Jan. 1 To Bank: Plant I 30,000 Dec. 31 By Depn. on
July 1 To Bank: Plant II 25,000 Plant I 3000
Plant II 1,250 4,250
By Balnance c/d
Plant I 27,000
Plant II 23,750 50,750
Total 55,000 Total 55,000
2021 2021
Jan. 1 To Bal b/d Oct. 1 By Depreciation on
Plant I 27,000 Plant I 1/3 750
Plant II 23,750 50,750 By Bank 5,500
By P& L A/c (Loss) 2,750
Oct. 1 To Bank -Plant III 15,000 Dec. 31 By Depn. on
Plant I (2/3) 2,000
Plant II 2,500

Depreciation and Amortization 555

 Plant III 375 4,875
By Balance c/d
Plant I (2/3) 16,000
Plant II 21,250
Plant III 14,625 51,875
Total 65,750 Total 65,750
2022 2022 By Depn. on
Jan. 1 To Balance b/d Dec. 31 Plant(2/3) 2,000
Plant I 16,000 Plant II 2,500
(2/3) Plant III 1,500 6,000
Plant II 21,250 By Balance c/d
Plant III 14,625 51,875 Plant I(2/3) 14,000
Plant II 18,750
Plant III 13,125 45,875
Total 51,875 Total 51,875

33. M/s. Tyagi & Sons purchased 10 trucks @ `50,00,000 each on 1st July 2017. On
1st October, 2019, one of the trucks is involved in an accident and is completely
destroyed and `35,00,000 is received from the insurance in full settlement. On the
same date, another truck is purchased by the company for the sum of `60,00,000.
The company writes off 20% of the original cost per annum. The company observes the
calendar year as its financial year.
Give the motor truck A/c for two years ending 31st December, 2020.
[Jan. 2021, 10 Marks]
Sol.
In the Books of M/s. Tyagi & Sons
Trucks A/c

Date Particulars Amount Date Particulars Amount

2019 2019
1Jan. To Balance b/d (WN-1) 3,50,00,000 1 Oct. By Depn. A/c 7,50,000
1 Oct. To Profit on destroyed Truck 7,50,000 [50,00,000×20%×(9/12)]
(WN-2) By Bank A/c 35,00,000
To Bank A/c 60,00,000 31 Dec. By Depn. A/c
(a) On 9 old trucks 90,00,000
(b) On 1 new truck 3,00,000 93,00,000
By Balance c/d
(a) 9 old trucks 2,25,00,000
(b) 1 new truck 57,00,000 2,82,00,000
Total 4,17,50,000 Total 4,17,50,000

P
556 Accounting W
2020 2020
1 Jan. By Balance c/d 31 Dec. By Depn. A/c
(a) 9 old trucks 2,25,00,000 (a) On 9 old trucks 90,00,000
(b) 1 new truck 57,00,000 2,82,00,000 (b) On 1 new truck 12,00,000 1,02,00,000
By Balance c/d
(a) 9 old trucks 1,35,00,000
(b) 1 new truck 45,00,000 1,80,00,000
Total 2,82,00,000 Total 2,82,00,000

Working Notes:

(1) Calculation of Balance as on 1st Jan., 2019:-

`

Cost of 10 trucks 5,00,00,000

Less: Dep. for 6 months of Year 2017 (50,00,000)
Less: Dep. of Year 2018 (1,00,00,000)
3,50,00,000
(2) Calculation of Profit or Loss on destroyed truck:-
Balance of 10 trucks as on 1st Jan., 2019 3, 50, 00, 000
=
10

Balance of destroyed truck = 35,00,000

Less: Depreciation of Year 2019 (7,50,000)
27,50,000
Less: Insurance Claim 35,00,000
Profit 7,50,000
Case II:
Working Note:
Plant-I Plant-II Plant-III
On Jan 1, 2020 30,000 On July 1, 2020 25,000 On Oct 1, 2021 15,000

Part I- Less: Dep. 1,250 Less: Dep. for 3M 375

COA 30,000 × 1/3 = 10,000 Balance as on 31/12/2023,750 Balance as on 31/12/2114,625

Less: Dep. 1,000 Less: Dep. 2,375 Less: Dep. 1463

Balance as on 31/12/20 9,000 Balance as on 31/12/2121,375 Balance as on 31/12/2213,162

Less: Dep for 9M 675 Less: Dep. 2,137

Balance on date of sale 8,325 Balance as on 31/12/2219,238

Less: Dep. 5,500

Loss2,825

Depreciation and Amortization 557

Part II-

COA 30,000 × 2/3=  20,000

Less: Dep. 2,000

Balance as on 31/12/2018,000

Less: Dep. 1,800

Balance as on 31/12/2116,200

Less: Dep. 1,620

Balance as on 31/12/2214,580

Plant A/c
Date Particulars L.F. Amount Date Particulars L.F. Amount

2020 2020
Jan. 1 To Bank: Plant I 30,000 Dec. 31 By Depn. on
July 1 To Bank: Plant II 25,000 Plant I 3000
Plant II 1,250 4,250
By Balance c/d
Plant I 27,000
Plant II 23,750 50,750
Total 55,000 Total 55,000
2021 2021
Jan. 1 To Balance b/d Oct. 1 By Depn. on
Plant I 27,000 Plant I (1/3) 675
Plant II 23,750 50,750 By Bank 5,500
Oct. 1 To Bank - Plant III 15,000 By P& L A/c (Loss) 2,825
Dec. 31 By Depn. on
Plant I (2/3) 2,000
Plant II 2,500
Plant III 375 4,550
By Balance c/d
Plant I (2/3) 16,200
Plant II 21,375
Plant III 14,625 52,200
Total 65,750 Total 65,750
2022 To Balance b/d 2022 By Depn. on
Jan. 1 Plant I 16,200 Dec. 31 Plant (2/3) 1,620
(2/3) Plant II 2,137
Plant II 21,375 Plant III 1,463 5,220
Plant III 14,625 52,200 By Balance c/d

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 Plant (2/3) 14,580
Plant II 19,238
Plant III 13,162 46,980

Total 52,200 Total 52,200

34. On 1.1.20 machinery was purchased for `40,000. On 1.7.21 addition were made to
the amount of `20,000. On 31.3.22 machine purchased on 1.7.21 costing `6,000 was
sold for `5,500 & on 30.6.22 machinery purchased on 1.1.20 costing `16,000 was
sold for `13,350. On 1.10.22 addition were made to the amount of `10,000.
Show Machinery A/c & Depreciation provision A/c for 3 years 2020, 2021, 2022.
Depreciate Machinery at 10% p.a. by S.L.M.
Sol.
Dr. Machinery A/c Cr.

Date Particulars ` Date Particulars `

1.1.20 To Bank A/c 40,000 31.12.20 By Balance c/d 40,000
40,000 40,000
1.1.21 To Balance b/d 40,000 31.13.21 By Balance c/d 60,000
1.1.21 To Bank A/c 20,000
60,000 60,000
1.1.22 To Balance b/f 60,000 31.3.22 By Bank A/c 5500
30.6.22 To P&L A/c (profit) 1,350 By Depn. provision A/c 450
1.10.22 To Bank A/c 10,000 By P&L (loss) A/c 50
30.6.22 By Bank A/c 13,350
By Depn. provision A/c 4,000
31.12.22 By Balance c/d 48,000
71,350 71,350

Alternatively sale of asset can be routed through asset disposal A/c as done in earlier question.

Dr. Provision for Depreciation A/c (SLM 10%) Cr.

Date Particulars ` Date Particulars `

31.12.20 To Balance c/d 4,000 31.12.20 By Depn. A/c 4,000
4,000 4,000
31.12.21 To Balance c/d 9,000 1.1.21 By Balance b/d 4,000
31.12.21 By Depn. A/c 5,000
9,000 9,000
31.3.22 To Machinery A/c 450 1.1.22 By balance b/d 9,000
30.6.22 To Machinery A/c 4,000 31.3.22 By Depn. A/c 150

Depreciation and Amortization 559

31.12.22 To Balance c/d 9,550 30.6.22 By Depn. A/c 800
31.12.22 By Depn. A/c 4050
14,000 14,000

Depreciation A/c

Date Particulars ` Date Particulars `

31.12.20 To Depn. provision A/c 4,000 31.12.20 By P&L A/c 4,000
4,000 4,000
31.12.21 To Depn. provision A/c 5,000 31.12.21 By P&L A/c 5,000
5,000 5,000
31.3.22 To Depn. provision A/c 150 31.12.22 By P&L A/c 5,000
30.6.22 To Depn. provision A/c 800
31.12.22 To Depn. provision A/c 4050
5,000 5,000

Working notes

(1) Sold on 31.3.2022 (2) Sold on 30.6.2022

1.7.2021 Cost 6,000 1.1.2020 Cost 16000

31.12.2021 Depreciation 300 31.12.2020 Depreciation 1600

1.1.2022 Balance 5,700 1.1.2021 Balance 14400

31.3.2022 Depreciation 150 31.12.2021 Depreciation 1600

31.3.2022 Balance 5,550 1.1.2022 Balance 12800

Sold’ for 5,500 30.6.2022 Depreciation 800

Loss 50 Balance 12000

Sold for 13350

Profit 1350

(3) Deprecation on 31.12.2022

Original cost of remaining old machine
40,000 - 16,000 = 24,000
20,000 - 6,000 = 14,000
38,000
Depreciation @10% 3,800
One new machine
10,000 × 10 ÷ 100 × 3 ÷ 12  250
4050

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35. A Trader purchased an old Machinery for `37,000 on 1st January, 2015 and spent
`3,000 on its overhauling. On 1st July 2016, another machine was purchased for
`10,000. On 1st July 2017, the machinery which was purchased on 1st January 2015,
was sold for `28,000 and the same day a new machinery costing `25,000 was purchased.
On 1st July, 2018, the machine which was purchased on 1st July, 2016 was sold for
`2,000.
Depreciation is charged @ 10% per annum on straight line method. He changed the
method and adopted diminishing balance method with effect from 1st January, 2016
and the rate was increased to 15% per annum. The books are closed on 31st December
every year.
Prepare Machinery A/c for four years from 1st January, 2015.
 [May 2019, 10 Marks]
Sol.
Machinery A/c

Date Particulars Amount Date Particulars Amount

2015 2015
Jan. 1 To Bank A/c (M1) 37,000 Dec. 31 By Depn. A/c 4,000
To Bank A/c (M1) - overhauling 3,000 By Balance c/d 36,000
Total 40,000 Total 40,000
2016 2016
Jan. 1 To Balance b/d (M1) 36,000 Dec. 31 By Depn. A/c
July 1 To Bank A/c (M2) 10,000 M1 5400
M2 750 6,150
By Balance c/d
M1 30600
M2 9250 39,850
Total 46,000 Total 46,000
2017 2017
Jan. 1 By Balance c/d July 1 By Depn. A/c 2,295
M1 30600 By Bank A/c 28,000
M2 9250 39,850 By Profit & Loss A/c (1) 305
July 1 To Bank A/c (M3) 25,000 Dec. 31 By Depn. A/c
M2 1388
M3 1875 3,263
By Balance c/d
M1 7862
M3 23125 30,987
Total 64,850 Total 64,850

Depreciation and Amortization 561

2018 2018
Jan. 1 By Balance c/d July 1 By Depn. A/c 590
M2 7862 By Bank A/c 2,000
M3 23125 30,987 Dec. 31 By Profit & Loss A/c (2) 5,272
By Depn. A/c 3,469
By Bank c/d 19,656
Total 30,987 Total 30,987

Working Note:-

(1) Calculation of Loss on Ist Machinery: `

Balance of Machinery as on 1 Jan, 2017 36,600
2,295
 15 6 
Less: Depreciation upto 1 July, 2017  30, 600 × × 
 100 12 
Balance of Machine on date of Sale 28,305
Less: Sale value of Machinery 28,000
Loss on sale of asset 305
(2) Calculation of Loss on IInd Machinery:
Balance of Machinery as on 1 Jan, 2018 7,860
590
 15 6 
Less: Depreciation upto 1 July, 2018 7,862 × × 
 100 12 

Balance of Machine on date of Sale 7,272

Less: Sale value of Machinery 2,000
Loss on sale of asset 5,272

36. Prime Streaming Co. acquired the streaming rights of a movie for `18,00,000 with the
contracted duration of the streaming period being 10 years. At the beginning of the
fourth year, based on the decline in viewership, Prime Streaming Co. decided to stream
the movie only for the next 5 years.
Required:

Calculate amortisation for the fourth year. (ICAI Study Material)
Sol. Amortisation every year will be = `18,00,000 / 10 = `1,80,000
Amortisation on SLM charged for 3 years = `1,80,000 x 3 = `5,40,000
Balance Amount of the S tr eaming Rights at the end of third year
= `18, 00, 000 – `5,40, 000 = `12,60, 000.
Balance useful life as per previous estimate = 7 years
Balance useful life as per revised estimate = 5 years
Amortisation from the 4th year onwards = `12,60,000 / 5 = `2,52,000 per annum

qqq

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