Question

on Jan 1st 2016 a limited company purchased machinery for 2000000. depreciation is provided 15% p.a. on diminishing balance method. on March 1 2018 one- fourth of machinery was damaged by fire and 40000 were received from the insurance company in full settlement. on September 1 2018 another machinery was purchased by the company for 1500000.write up the machinery account from 2016 to 2018. books are closed on December 31 every year​

Answer 1

Answer:

Top 7 Methods for Calculating Depreciation

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Various methods of depreciation are generally classified as follows:

1. Straight Line Method:

This method assumes that depreciation is a function of time rather than use. This method is based on the assumption that each accounting period receives same a benefits from using the assets. It allocates an equal amount of depreciation in each accounting periods of the service life of the assets. Therefore, it is called Straight Line Method.

The formula for calculating depreciation charge for each accounting period is:

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Advantages:

(i) It is simple in use.

(ii) It realistically matches cost and revenue and determine income of each period easily.

(iii) There is no change either in the rate or the amount of depreciation over the useful life of the assets. Such a procedure provides for improved comparability.

Disadvantages:

(i) It ignores the cost of capital.

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(ii) It is based on the wrong assumption of equal utility of the assets during the useful life.

(iii) It is also wrong to consider depreciation as a function of time rather than use.

(iv) The maintenance of asset is generally costly in the later years with the result that deductions from the revenue would be greater in later years than in the earlier years.

The journal entry for recording depreciation is

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Depreciation A/c Dr.

To Asset A/c

Illustration 1:

ABC Ltd. acquires a machine on 1st July, 2007 at a cost of Rs. 2, 80,000 and spent Rs. 20,000 on its installation. The firm writes off depreciation at 10% of the original cost every year. The books are closed on 31st December every year. Prepare machinery A/c for 3 years.

Explanation: