Question

2. On January 1, 2007 M/s Ram & Sons purchased Machinery for Rs. 2,00,000. They spent Rs. 12,000
on freight and Rs. 8000 for its installation. The expected life of the machine is 10 yrs. It is
expected that the machine will be sold for Rs. 20,000 after its useful life. Prepare machinery
account and depreciation account for 3 yrs. Books of Accounts are closed on December 31, every
year (2011).
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Answer 1

Answer: All expenses incurred till the time the asset becomes operational should be considered as the cost of the asset. Thus, Freight Charges and installation cost on Purchase of Machinery will be added to cost of asset.

Cost of the asset for depreciation=200000+8000+12000=220000

Explanation:

Depreciation shall be calculated on SLM Basis. Hence depreciation for each year will be same.

Depreciation =( Cost of the asset- value after the residual life)/ Life of the asset

= (220000-20000)/10= 20000