A company purchased machinery for ? 2,00,000 on 1st April 2016. The machinery is
depreciated @ 10% p.a. of cost. On ist October, 2018. the machinery was sold for? 1,20,000
Draw the Machinery Account for the years ended 31 March 2017 2018 and 2019
solve this question using written down value method
Answers
Answer:
Refer to the attachment.
What is depreciation?
Depreciation means gradual fall in the value of fixed assets over time due to efflix of time, obsolescence, accidents, use of assets etc.
Concept of WDV:
Written down value (WDV) method is the method of calculating depreciation in which we apply depreciation on the book value of assets and not on the historical cost.
This means that for example, Mr. A bought a machine for Rs. 10,000 and it is to be depreciated for 7 years for 1% p.a. Using WDV, we will calculate the depreciation as follows:
At the end of first year:
1% of 10,000 = Rs. 100
Balance left: Rs. 9,900
At the end of second year:
1% of 9,900 = Rs 99
Note that we took 1% of balance left and not of 1% of 10,000, ie, the historical cost.
Now, balance left: Rs. 9,801
Similarly, at the end of third year:
1% of 9,801 = Rs. 98 approx.
Balance left: Rs. 9703
and so on.
Explanation of Answer:
The machinery was purchased of 2016 Apr 1, so we debited the machinery account and credited the bank or cash account by Rs. 2,00,000.
At the end of this year, on 31 March 2017, the depreciation comes out to be Rs. 20,000. So, we credit the machinery account and debit the depreciation account by Rs. 20,000.
The balance of machinery left was Rs. 1,80,000, which was carried down to the next year, ie 2017 Apr 1.
Then, at the end of the second year, ie on 31 March 2018, the value of depreciation was Rs. 18,000. The balance left was Rs. 1,62,000 which was carried down to the next year- 2018, Apr 1.
On Oct. 1, 2018, the machinery was sold for Rs. 1,20,000. But, before recording that, we need to calculate depreciation for 6 months, ie from April 2018 to Oct 2018, which came out to be Rs. 8,100. In the working note, we calculated the balance of machinery left after deducting depreciation which came out to be Rs. 1,53,000. After deducting the sale value of the machinery, ie Rs. 1,20,000, we came to know that we suffered a loss of Rs. 33,000 on sale of machinery.
So, on Oct 1, 2018, we made the following entries:
1. Credited the machinery account and debited the depreciation account by Rs. 8,100.
2. Credited the machinery account and debited the bank account by Rs. 1,20,000. (because of sale of machinery)
3. Debited the Profit and Loss Account and credited the machinery account by Rs. 33,000.
Upon totaling the debit and credit sides of the machinery account now, we find that the balance is equal. So, the account gets closed here and no balance is left.
This happened because we sold all the machinery and therefore, nothing was left.
