Depreciation and Assets Disposal - Principles of Accounting

Depreciation and Assets disposal - Principles Of Accounting
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Depreciation, Provision for depreciation and Asset disposal account Depreciation is the part of the cost of the fixed asset consumed during its period of use by the business. In other words, it is the gradual reduction in the value of the fixed asset due to several reasons. Like other business expenses, depreciation is also a business expense to be charged to the profit & loss account at the end of every year. Cases of depreciation a. Wear and tear: Because of the regular usage in the business, the fixed assets eventually wear out. b. Erosion, rust and decay: Erosion is subjected to asset like land, rust causes to the asset like plant & machinery and decay is a process which will also be present due to the elements of nature and the lack of proper attention. c. Obsolescence: This is the process of becoming out of date, then the value becomes less compared to the new and up-to-date equipment. d. Inadequacy: This arises when an asset is no longer used because of the growth and changes in the size of the firm. e. The time factors: This is applicable in the case of assets taken on the basis of lease. When the years are finished the lease is worth nothing.
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f. Depletion: This is applicable to the wasting assets like mines, quarries and oil wells. According to the quantity of extraction of the raw material from the wasting asset, the value remaining will be less. Methods of calculating depreciation charges Straight line method: This method is also known as fixed instalment method or original cost method. Under this method, the cost of the asset (minus net residual value if any) is divided by the expected number of years of use of the asset. Thus under this method, depreciation is = Cost estimated disposable value( residual value Number of expected years of use E.g.: A business bought a plant at a cost of $ 20 000, with an estimated life of 5 years and an estimated residual value of $ 2 000, the annual depreciation on this asset will be 20000 2000 5 Reducing balance method: Under this method, a fixed percentage of reduced balance (cost less depreciation already charged )of the asset is calculated as depreciation at the end of every year. During the first year, the calculation will be made on the original cost of the asset E.g.: An asset was bought for $ 40 000 on 1-1-1988. It was decided to charge the depreciation on this asset @ 10% under reducing balance method. The depreciation on this asset will be: 31st Dec 1998 31st Dec 31st Dec 1999 2000 40000 = 4000 40000- 4000 = 3600 40000- 4000-3600= 3240 =3600 (every year)
Thus under this method, the yearly depreciation will be reducing year after year. But in Revaluation method: Under this method, the depreciation is calculated by comparing
the case of fixed instalment method, the amount of depreciation will be fixed or same every year.
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the opening and closing values of the asset. The difference between these values will be taken as the amount of depreciation during that year. This method is suitable for the assets like small tools, screwdrivers, spanners etc. Residual value: This is the value that the business will get from the sale of an asset at the end of its useful life time. It is also known as scrap value or salvage value Provision for depreciation This is the provision created to cover the expense of depreciation on fixed assets. Every year the amount of depreciation is credited to this account and debited to the profit & loss account. The depreciation amount will accumulate year after year. At the end of the life of the asset or at the time sale of the asset, the accumulated depreciation is transferred to the asset account or the asset disposal account. At the end of every year, the balance in the provision for depreciation is shown as a deduction from the cost price of the concerned asset.
The double entry for creating the provision for depreciation is: Profit & loss account Dr. Provision for depreciation account Cr. Disposal of an asset
When an asset is sold, the procedure will recorded in a separate account called asset disposal account. The following double entries are required for recording these transactions in the books of the business: 1. For transferring the cost price of the asset sold to the asset disposal account Asset disposal account Asset account Dr Cr.
2. For transferring the provision for depreciation already charged on the asset sold from the provision for depreciation account to the asset disposal account: Provision for depreciation account Asset disposal account Dr. Cr.
3. For recording the cash or cheque received from the sale of the asset: Cash / Cheque Dr.
Asset disposal account Cr. 4. To record the profit on sale of the asset: Asset disposal account Profit & Loss account Dr. Cr. 5. To record the loss on sale of the asset: Profit & loss account Asset disposal account Key points Profit / loss on sale of asset = (Sale proceeds of assets + provision for depreciation to date) Cost price of the asset sold. (Positive figure is profit on sale of asset and negative figure is loss on sale of asset) Under straight line method, the value of asset will be reduced to zero or the scrap value at the end of its useful life. Under the reducing balance method the amount of depreciation reduces year after year. Profit on sale of asset is credited to the profit & loss account Loss on sale of asset is debited to the profit & loss account. In the balance sheet, the total depreciation charged on the asset to the date of balance sheet, is deducted from the concerned asset. MCQ 1. Under the fixed instalment method, the amount of depreciation will: B. Increase every year D. None of these Dr. Cr
A. Decrease every year C. Be the same every year
A. It is an income to be shown in the profit & loss account B. It is an expense to be shown in the profit & loss account only C. It is the decrease in the amount of expense
2.
What is more correct about depreciation from the following?
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D. It is the expense to be shown in the profit & loss account and shown deduction from the concerned asset in the balance sheet
3. To calculate the depreciation the opening and closing balances are compared under which method? A. reducing balance method C. original cost method B. fixed instalment method D. revaluation method
4.
A Delivery van was purchased for $ 8 000 by cheque. The double entry to record this is:-
A. Debit bank account and credit delivery van account B. Debit delivery van account and credit cash account C. Debit cash account and credit delivery van account D. Debit delivery van account and credit bank account 5. The double entry to record the profit on sale of a fixed asset is: A. debit asset disposal account and credit profit & loss account B. debit asset account and credit cash account C. debit profit and loss account and credit asset disposal account D. debit profit and loss account and credit provision for depreciation account
6.
A plant costing $ 40 000 is depreciated by 20% p.a. on cost. What will be the value of the plant account to be shown in the balance sheet at the end of the third year? B. $ 16 000 C. $10 000 D. $ 8 000
A. $ 12 000
A. $ 2 000 B. $ 4 000 C. $ 3 600 D. $ 3 200 A furniture is bought for $4 000. The estimated life of the asset is 5 years. The estimate scrap value of the asset at the end of 5th year is $ 1000. What is the yearly depreciation under the straight line method? 8. A. $ 600 B. $ 500 C. $ 700 D. $ 1 000 9. Which of the following is not a fixed asset? B. Plant & Machinery C. Filing cabinet D. Repairs to furniture
7. A machinery was bought for $ 20 000. It was decided to depreciate this asset under the diminishing balance method @ 20% per annum. What is the amount of depreciation at the end of the second year?
A. Goodwill
10.
The double entry for creating the provision for depreciation is to:-
A. Debit profit & loss account and credit provision for depreciation account B. Debit provision for depreciation account and credit profit & loss account C. Debit profit & loss account and credit asset account D. Debit profit & loss account and credit asset disposal account Assignment questions Q1 A machinery which was bought on 1-1-2001 at a cost of $15 000 and depreciated @ 10% p.a under straight line method, sold for cash $ 6500 on 31st Dec 2004. The accounting year of the business ends on 31st Dec each year. Calculate the amount of profit or loss on sale of the machinery.
Q2.
A plant which was bought on 1-1-2003 at a cost of $ 20 000 and depreciated @ 20% under
straight line method, sold by cash $ 10 000 on 31st December 2004.
Calculate the amount of profit or loss on sale of the plant. Q3. A piece of furniture was bought on 1-1-2002 at a cost of $ 12 000 and depreciated @ 12% p.a.
The accounting year of the business ends on 31st December each year.
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under straight line method, sold by cash $ 5 000 on 30th June 2004. The accounting year of the business ends on 31st December each year. Calculate the amount of profit or loss on sale of the furniture.
Q4.
A machine which was bought on 1-1-2001 at a cost of $ 25 000 and depreciated @ 20% p.a.
under straight line method, sold by cheque $ 7 500 on 30th September 2004. The accounting year of the business ends on 31st December each year. Calculate the amount of profit or loss on sale of the machine.
Q5. Calculate the amount of profit or loss on sale of the plant. Q6.
A plant which was bought on 1-1-2003 at a cost of $ 10 000 and depreciated @ 20% p.a. under
straight line method, sold for $ 7 000 by cheque on 30th June 2004.The accounting year of the business ends on 31st December each year.
A machine which was bought on 1-1-2002 at a cost of $ 8 000 and depreciated @ 10% p.a. under
reducing balance method, sold for cash $ 5 500 on 31st December 2004. The accounting year of the business ends on 31st December each year. Calculate the amount of profit or loss on sale of the machine.
Q7.
A machine which was bought on 1-1-2003 at a cost of $ 10 000 and depreciated@ 10% p.a.
under written down value method, sold by cheque $ 8 200 on 31st December 2004. The accounting year of the business ends on 31st December each year. Calculate the amount of profit or loss on sale of the machine.
Q8.
A plant which was bought on 1-1-2003 at a cost of $ 12 000 and depreciated @ 10% p.a. under
reducing balance method, sold by cheque $ 9 500 on 30th June 2004. The accounting year of the business ends on 31st December each year. Calculate the amount of profit or loss on sale of the plant.
Q9. A plant which was bought on 1-1-2001 for $ 25 000 is depreciated @ 10% p.a. under reducing balance method. The financial year of the company ends on 31st December each year. What is the value of the plant on 1-1-2005? Q10 A company bought a machinery on 1-1-2002 for $ 20 000. It is the policy of the company to charge depreciation @ 10% p.a. on cost on the principle that one months ownership needs one months depreciation. Calculate the value of machinery on 1-1-2005. Q11. A business bought a computer for $ 5 000 on 30th June 2003. The business decided to charge depreciation on the computer @ 25% p.a. under fixed installment system. The financial year of the business ends on 31st December each year. What is the value of the computer on 31st December 2004? Q12. A business purchased a Machine at a cost of $ 40 000 on 1-11-2003. For the purchase of this asset, the business spends the following expenses also:Legal charges Carriage on asset Cost of installation $ 2 000 $ 1 500 $ 4 000
On 31-12-2003, what is the value of the Machine to be shown in the balance sheet Long questions Q1 The following information is relating to the business of Salvy:Bought Plant costing $ 30000 by cheque Bought Plant costing $ 40000 by cash Bought Plant costing $ 50000 on credit from Simmons Bought Plant costing $ 20000 by cheque Bought Plant costing $ 50000 by cash Bought Plant costing $ 60000 by cheque
On 1-1-1998 On 1-7-1998 On 1-1-1999 On 1-10 1999 On 1-1-2000 On 1-4-2000
The financial year of the business ends on 31st Dec each year.
Required to prepare for the three years ended 31st Dec 1998, 1999 and 2000:a. The plant account b. The provision for depreciation account.
The provision for depreciation is to be calculated @ 10% p.a. under straight line method on the principle that one months ownership needs one months depreciation policy.
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Q 2.
The following information is obtained for the books of a business for the three years :Balance in the Machinery account $ 50 000
On 1-1-1998 On 1-1-1998 On 1-7-1998 On 1-4-1999 On 1-1-2000 On 1-10-2000
Balance in the provision for depreciation account $ 5 000 Bought Machinery on credit from Sansui Co. Ltd $ 40 000 Bought Machinery by cheque $ 20 000 Bought Machinery by cash $ 10 000 Bought Machinery by cheque $ 60 000
It is the policy of the business to depreciate its fixed assets @ 15% p.a. under straight
Required to prepare for the three years ended 31st Dec 1998,1999 and 2000:a. The machinery account b. The provision for depreciation account. Q 3. A company maintains the provision for depreciation account and the asset account separately. For the years ended 31st Dec 1998, 1999 and 2000, the following information is available from the books of the business relating to its Machinery :On On On 1-1- 1998 1-1-1998 1-7-1998 the balance in the Machinery account $ 60 000 the balance in the provision for depreciation account $ 12 000 Bought Machinery costing $ 50 000 by cash sold one of the machineries which was bought on 1-1-1996 at a cost
line method for each month of ownership.
On 31-12-1998
of $ 20 000, for a sum of $ 5 600. On On 1-1- 1999 1-10 1999 Bought Machinery costing $ 40 000 by cheque Bought Machinery costing $ 10 000 by cash.
It is the policy of the business to create the provision for depreciation @ 10% p.a. on cost for each month of ownership.
Required to prepare for the three years ended 31st Dec 1998, 1999 and 2000:a. The plant account b. The provision for depreciation account c. The Plant disposal account d. The extracts from the profit & loss account e. The extracts from the balance sheet Q 4. A company depreciates its fixed assets @ 20% p.a. under straight line method for each month of ownership. Its plant at a cost of $ 50 000 was bought on 1-7-1997. on 1-7-1997 there was a balance of $ 10 000 in the provision for depreciation account. On 31-12-1998,the company sold a part of the plant costing $ 30 000, for a sum of $ 7 000 and received cash. On the same day the company bought another plant costing $ 20 000 on credit from United furniture Ltd. On 1st Jan 1999, the company bought another plant at a cost of $ 40 000 by cheque. The financial year of the company ends on 30th June each year. Required to prepare:a. The plant account for the years ended 30th June 1998 and 1999 b. The provision for depreciation account for the years ended 30th June 1998 and 1999 c. The plant disposal account d. The extracts from the profit & loss account for the years ended 30th June 98 and 99 e. The extracts from the balance sheet for the years ended 30th June 1998 and 1999 Q 5. The following information is relating to the Motor Van owned by a business:Bought motor van by cash Bought motor van by cheque Bought motor van by cash $ 20 000 $ 10 000 $ 15 000
1992 Jan 1 1992 July 1 1992 Oct 1 1993 April 1
Bought motor van from Samson & company $ 25 000 1993 Oct 31 1994 July 1 1994 July 1 Settled the account of Samson & company. $ 30 000 Bought motor van by cash Sold for cash $ 4 400 the motor van which had been bought on 1st
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July 1992, at a cost price of $ 10 000 The financial year of the business ends on 31st Dec each year. It is the policy of the business to depreciate the motor van @ 10% p.a. under straight line method for each month of ownership. From the above information, prepare: a. The motor van account for 3 years ended 31st Dec 1992, 1993 and 1994. b. The provision for depreciation account for 3 years ended 31st Dec 1992, 93& 94. c. The extracts from the balance sheet for 3 years ended 31st Dec 1992, 1993 & 1994 d. The motor van disposal account.
Q 6. plant account:1991 Jan 1 Balance in the plant account $ 15 000 ( bought on 1-1-1990 ) 1991 Jan 1 Balance in the provision for depreciation account $ 750 1991 July 1 Bought plant on credit from S.Sita, costing $ 10 000 1991 Oct 1 Bought plant for cash $ 20 000 1992 July 1 Bought plant by cheque $ 10 000
Alifulhu & Co. depreciates its fixed assets @ 5% on cost on the principle that one
months ownership needs one months depreciation. The following information is relating to its
1992 Oct 1 Sold the plant for cash $ 7 250, which had been bought on 1-1-1990 at a cost of $ 15 000 1993 Jan 1 Bought plant costing $ 15 000 by cheque. 1993 Oct 1 Bought plant costing $ 5 000 by cash. The final accounts of the company are prepared on 31st December each year. From the above information, prepare:-
a. The plant account for 3 years. b. The provision for depreciation account for three years. c. The plant disposal account. d. The extracts from the profit & loss account for 3 years. e. The extracts from the balance sheet for 3 years , Q 7. A business depreciates its Furniture @ 10% p.a. under straight line method for each month of ownership. On 1-1-1998, bought furniture costing $ 50 000 by cash. On 31st December 1999, furniture costing $ 20 000 was sold for $ 7 500. On 1st Jan 2000 bought another furniture costing $ 40 000 by cheque. The financial year of the business ends on 31st Dec each year. Required to prepare: a. The furniture account for the years ended 31st Dec 1998, 1999 and 2000 b. The provision for depreciation account for the years ended 31st Dec 98, 99 & 2000 c. The Furniture disposal account d. The Extracts from the profit & loss accounts for the years ended 31st Dec 98, 99& 2000 e. The extracts from the balance sheets for the years ended 31st Dec 1998, 1999&2000 Q 8. The following details were extracted from the books of a sole trader regarding his Motor car:1-1-2000 Balance B/D in the motor car account $ 9 000 $ 60 000
Provision for depreciation on motor car B/D 1-7-2000 30-6-2001 1-4-2002
Bought motor car by cheque from Jennifer car suppliers for $ 29 000 Bought motor car by cash for $ 36 000
Sold one old motor car for $ 22 000 to Neena on credit. This motor car was purchased
on 1st January 1999 at a cost of $ 45 000.
The trader had a policy of depreciating the fixed assets @ 15% p.a using the principle that
One months ownership needs one months depreciation Prepare for three years ending 31-12- 2000, 31-12-2001 & 31-12-2002:-
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1. Motor cars account 2. Provision for depreciation on motor cars account 3. Motor cars disposal account Q9 The following information relates to the motor vehicles owned by Surya who commenced business on 1st May 1998:1st May 1998 1st May 1998 30th June 1998 1st May 2000 suppliers. 30th April 2000 Bought motor vehicles $ 20 000 0n credit from M Khanna.
Bought motor vehicles for $ 24 000 by cheque. Paid M Khanna by cheque $ 20 000 Bought two motor vehicles on credit for $ 26 000 each form Balu motor vehicles Settled Balu Motor Suppliers by cheque
30th April 2000 one month depreciation policy.
Sold for $ 10 000 cash the motor vehicles bought on 1st May 98 for 20 000 to Baby.
The financial year of Surya ends on 30th April 1999, 2000 and 2001. Surya used to depreciate the vehicles by 20% per annum on cost using one month ownership needs
For the year ending 30th April 1999, 2000 and 2001, write up the following accounts as they would appear in the books of Surya. 1. Motor vehicles account 2. Provision for depreciation account 3. Motor vehicles disposal account 4. State two factors which are considered in calculation of depreciation on fixed assets.
Q 10 The following information relates to the motor vehicles owned by Boro Limited which commenced business on 1st May 2000. 1st 1st May 2000 May 2000 Bought motor vehicles $ 10 000 on credit from Parkside Garage Bought motor vehicle $ 12 000 by cheque Paid Parkside Garage $ 10 000 by cheque Bought motor vehicles for $ 13 000 on credit from Parkside Garage Settled Parkside Garages account by cheque Sold for $ 5 000 cash the motor vehicle which was bought on 1st May 2000, for $ 10 000
30th June 2000 1st May 2002 31st May 2002 20th July 2002
The financial year of Boro limited ends on 30th April each year. It is company policy to depreciate motor vehicles owned by 20% p.a. on cost, but no depreciation is charged on a motor vehicle in the year in which it is sold. Required 1. Why do firms depreciate fixed assets 2. Briefly explain the reducing balance method of depreciation 3. For the years ending 30thApril 2001,2002 & 2003 write up the following accounts as they would appear in the books of Boro Limited 1. The motor vehicle account 2. The provision for depreciation account Q. 11 On 1st January 1999, Shira, a business woman had the following balances in her books:$ 90 000
Motor car (cost)
Provision for depreciation on motor car $ 18 000 On 1st April 1999, she purchased two motor cars for $ 26 000 each by cheque. On 1st July 2000, she bought a new motor car for $ 30 000 on credit from Shemba motor car manufacturers. On 30th June 2001, she sold one motor car for $ 12 000 which was purchased on 1st January 1998 at a cost of $ 45 000.Shira depreciated the fixed assets @ 20% p.a. on cost using one months ownership needs one months depreciation policy Required to: 1. Prepare motor car account for three years ending 31st December 1999, 2000 & 2001. 2. Prepare provision for depreciation accounts for three years ending 31st December 1999, 2000 & 2001. 1. Prepare motor car disposal account. 2. Prepared balance sheets extracts for three years ended 31st December 1999, 2000 & 2001.
Q.12 ABC Company purchased three motor vehicles at $ 20 000 each by cheque on 1-1-1999. The estimated life of the three assets are five years. The company decided to depreciate these assets on fixed instalment method. The estimated scrap value of each asset is $ 2000.
At the end the third year, the company decide to sell all these three assets due to over consumption of fuel. The three motor vehicles were sold on the last day of the third year for cash as follows.
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Motor vehicle 1 for $ 11 000 Motor vehicle 2 for $ 9 000 Motor vehicle 3 for $ 10 000 On the same day the company bought two new motor vehicles on credit from Heera Engineering Limited at $ 25 000 each. Required to:1. Prepare the motor vehicles accounts for the three years. 2. Prepare the provision for depreciation on motor vehicles accounts for 3 years. 3. Prepare the motor vehicle disposal account. Incoming search terms:
provision for depreciation of motor vehicles accounting for depreciation for motor vehicles disposal account extract disposal account on final accounts disposals furniture account at cost how to calculate depreciation on profit and loss account reducing balance installments to depreciate accounting Motorvan(at valuation)incomplete record in accounting profit or loss on disposal of fixed assets provision fer depreciation account
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