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Karnataka 1st PUC Accountancy Question Bank Chapter 7 Depreciation, Provisions and Reserves
1st PUC Accountancy Depreciation, Provisions and Reserves Text Book Questions and Answers
Short Questions and Answers
Question 1.
What is Depreciation?
Answer:
Every business acquires fixed assets fpr its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time, thus, due to their regular use, there occurs continuous wear and tear and consequently fall in their value. This fall in the value of fixed assets, due to their regular use or expiry of time is termed as depreciation.
A machinery costing Rs 1,00,000 and its useful life is 10 years; so, depreciation is calculated as:
Question 2.
State briefly the need for providing depreciation.
Answer:
The needs for providing depreciation are given below.
a. To ascertain true net profit or net loss: Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to Profit and Loss Account. Assets are used for earning revenues and its cost is charged in form of depreciation from Profit and Loss Account.
b. To show true and fair view of financial statements: If depreciation is not charged, assets are shown at higher value than their actual value in the Balance Sheet; consequently, the Balance Sheet does not reflect true and fair view of financial statements.
c. For ascertaining the accurate cost of production: Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low sale price and thus leads to low profit.
d. Distribution of dividend out of profit: If depreciation is not charged, which leads to overestimating of profit and consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.
e. To provide funds for replacement of assets: Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life.
f. Consideration of tax: If depreciation is charged, then Profit and Loss Account will disclose lesser profit as to when the depreciation is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amout.
Question 3.
What are the causes of depreciation?
Answer:
a. Constant use: Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.
b. Expiry of time: With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.
c. Obsolescence: Due to the fast technological innovations and inventions today’s assets may be outdated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets.
d. Expiry of legal rights: If an asset is acquired for a specific period of time, then, whether the asset is put to use ornot, its value becomes zero at the end of its useful life. For example, if a land is acquired for Rs 1,00,000 for 25 years on lease, then each year its value depreciates by of its gross value. At the end of the 25th year, the value of the lease will be. zero.
d. Accident: An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity. The loss due to accident is permanent in nature.
e. Permanent fall in value: Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall in market price is permanent, it is accounted, which leads to a fall in the value of fixed assets in the books.
Question 4.
Explain basic factors affecting the amount of depreciation
Answer:
a. Total cost of asset: The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing asset and bringing the asset to its usable condition are included in the total cost of asset.
b. Estimated useful life: Every asset has its useful life other than its physical life (in terms of number of years, units, etc.), used by a business. The useful life of an asset is considered to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if business acquiress a piece of land on lease for 25 years, then the useful life of the piece of land is considered to be 25 years.
c. Estimated scrap value: It is estimated as the net realisable value or sale value of an asset at the end of its effective life. It is deducted from the total cost of an asset. For example, furniture is acquired at Rs 50,000 and its effective life is 10 years.
After 10 years, the furniture will be sold at Rs 10,000. So, depreciation is charged as:
d. Distinguish between straight line method and written down value method of calculating depreciation.
Straight line method: The depreciable amount is same for year and it will change only when there is sale of asset.
Written down value method: The depreciable amount changes every year. Depreciation is calculated on the value of asset that is carried down to next year.
e. In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss’ account on account of depreciation and repair.
If the management does not want to exert undue burden on the profits due to high depreciation and repair costs in the latter years of the assets, then written down method’ should be a preferred method to provide depreciation. This is because the cost of depreciation reduces; whereas, repair and maintenance expenses increase in the latter years. However, on the whole, it does not exert increasing burden on profits.
Question 5.
What are the effects of depreciation on profit and loss account and balance sheet?
Answer:
The effects of depreciation on Profit and Loss Account are given below.
- Depreciation increases the debit side of profit and loss account and hence reduces net profit.
- Depreciation increases the total expenses, leading to an excess of debit over credit balance.
The effects of depreciation on Balance Sheet are given below.
- It reduces the original cost or book value of the concerned asset.
- It reduces the overall balance of asset’s column in the balance sheet.
Question 6.
Distinguish between provision and reserve.
Answer:
Question 7.
Give four examples each of provision and reserves.
Four examples of provision are given below.
Answer:
- Provision for bad and doubtful debts
- Provision for discount on debtors
- Provision for depreciation
- Provision for taxation
Four examples of reserve are given below.
- General reserve
- Capital reserve
- Dividend equalisation reserve
- Debenture redemption reserve
Question 8.
Distinguish between revenue reserve and capital reserve.
Revenue reserve and capital reserve
Answer:
Revenue reserve is the reserve made for the sale, of sales, incomes etc.
Capital reserve is the reserve made for the purpose to meet needs of capita.
Question 9.
Give four examples each of revenue reserve and capital reserves.
Four examples of revenue reserve are given below.
Answer:
- General Reserve
- Retained Earnings
- Dividend Equalisation Reserve
- Debenture Redemption Reserve
Four examples of capital reserve are given below.
- Issues of shares at premium
- Profit or issue of shares
- Sale of fixed assets
- Profit on redemption of debentures
Question 10.
Distinguish between general reserve and specific reserve.
Answer:
General reserve and Specific Reserve :
General reserve is the reserve made to meet some specific purposes.
Specific reserve it the reserve to meet the sudden and special cases.
Question 11.
Explain the coqcept of secret reserve.
Answer:
Reserves that are created by overstating liabilities or understating assets are known as secret reserves. They are not shown in the balance sheet. These reduce tax liabilities, as the liabilities are overstated. It is created by management to avoid competition by reducing profit. Creation t>f secret reserve is not allowed by Companies Act, 1956 that requires full disclosure of all material facts and accounting policies while preparing final statements.
Long Questions and Answers
Question 1.
Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
Depreciation
Answer:
Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time (due to their regular use), there exists continuous wear and tear and consequently fall in their value. This fall in the value of fixed assets (due to regular use or expiry of time) is termed as depreciation.
A machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation will be calculated as:
a. To ascertain true net profit or net loss – Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to profit and loss account. Assets are used for earning revenues and its cost is charged in form of depreciation from profit and loss account.
b. To show true and fair view of financial statements: If depreciation is not charged, assets are shown at higher value than their actual value in the balance sheet; consequently, the balance sheet does not reflect true and fair view of financial statements.
c. For ascertaining the accurate cost of production: Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low sale price and thus leads to low profit.
d. Distribution of dividend out of profit: If depreciation is not charged, which leads to overestimating of profit and consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.
e. To provide funds for replacement of assets: Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life.
f. Consideration of tax: If depreciation is charged, then profit and loss account will disclose lesser profit as to when the depreciation is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount.
Below are given the causes for depreciation.
a. Constant use: Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.
b. Expiry of time: With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.
c. Obsolescence: Due to the fast technological innovations and inventions today’s assets may be outdated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets.
d. Expiry of legal rights: If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life. For example, if a land is acquired for Rs 1,00,000 for 25 years on lease, then each year its value depreciates by of ifo gross value. At the end of the 25th year, the value of the lease will be zero.
e. Accident: An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity. The loss due to accident is permanent in nature.
f. Permanent fall in value: Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall in market price is permanent, it is accounted, which leads to a fall in the value of fixed assets in the books.
Question 2.
Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.
Answer:
Straight Line method: It is a simple method of charging depreciation. Under this method, depreciation is charged on the original cost of an asset, at a fixed rate of percentage. In this method, amount of depreciation remains same from year to year and asset’s value becomes zero at the end of its useful life.
Advantages of Straight Line Method:
- It is simple to calculate.
- Asset can be completely written off, i.e., asset can be depreciated until the net scrap value is zero.
- Same amount of depreciation is charged every year. Therefore, it helps in easy comparison of Profit and Loss Account for different years.
- It is used for assets that have low repairs and maintenance expenses and are continuously used over a period of time.
Limitations of Straight Line Method:
- Burden of deprecation is more on profit and loss account in the later years, when repair and maintenance costs increase, as asset becomes older.
- Value of asset becomes zero in the books even if asset is still in usable condition in business.
Uses of Straight Line Method
- This method is useful where repairs and maintenance expenses on asset are low.
- It is also useful when an asset is continuously used from one year to another.
- It is useful when the value of assets, such as patent, copyright, goodwill, etc., becomes zero
Written Down Value Method:
- book value of the asset. In this method, asset’s value goes on diminishing year after year and the amount of depreciation declines.
- Rate of depreciation is calculated as follows:
R represents rate of depreciation
n represents expected useful life of the asset
s represents the scrap value
c represents the cost of the asset
Advantages of Written Down Value Method:
- It is based on the logical assumption that asset is used more in the earlier years, so more cost is charged in form of depreciation.
- It is suitable for the assets where repairs are more in the later years, as depreciation is lesser and on a whole the combined burden of depreciation and repairs exerts equal pressure on the net profit over years.
- This method is accepted by the income tax authorities.
- As more depreciation is charged in the earlier years, so the loss due to obsolescence of the asset is reduced.
Limitations of Written Down Value Method:
- It is difficult to calculate and is a time consuming process.
- The value of an asset cannot be zero, thus the asset cannot be completely written off.
- There arises shortage of funds for replacement of new asset. This happens due to the fact that the amount of depreciation is retained and used in the business. Consequently, at the end of the useful life of an old asset, business finds it difficult to arrange funds for its replacement.
Uses of Written Down Value Method
- It is useful when assets have long life.
- It is useful for those assets that require more repair and maintenance costs in the later years.
- It provides easy calculation to provide depreciation of additional asset purchased during a year.
Straight line method, Written down value method
| Calculated an original cost | Calculated on book value |
| Depreciation amount is fired | Almost equal bet decreases |
| Not recognized by income tax law | Recognized by income tax law |
| It is suitable for assets in which repair change are less | It is suitable for assets which are affected by technology changes |
Question 3.
Describe in detail two methods of recording depreciation. Also give the necessary journal entries.
Answer:
The two methods of recording depreciation are diagrammatically presented below.
a. Charging depreciation to Asset Account: Under this method, depreciation is directly credited to the asset account and no separate account is prepared for provision of depreciation. Under this method, the original cost of an asset and the total amount of depreciation cannot be determined from the Balance Sheet, as the Asset Account appears at its written down value.
Journal entries for depreciation are given below.
When depreciation is charged to Assets Account Depreciation A/c Dr.
To Assets A/c
(Depreciation charged to Assets Account)
Profit and Loss A/c
To Depreciation A/c
(Depreciation transferred to Profit and Loss Account)
b. Creating Provision for Depreciation Account: Under this method, depreciation is not credited to the Assets Account; in fact, it is credited to the provision for Depreciation Account. At the year end, asset is shown at the original cost in the Balance Sheet and total depreciation up to the date of Balance Sheet is shown as Provision for Depreciation Account.
Journal entries for depreciation are:
Charging Depreciation
Depreciation A/c
To Provision for Depreciation A/c
(Depreciation charged)
Closing of Depreciation Account Profit and Loss A/c
To Depreciation A/c
(Depreciation account is transferred to Profit and Loss Account)
When the asset is sold, the accumulated depreciation on that asset is credited to the Asset Account by passing the following Journal entry: Provision for Depreciation A/c
To Asset A/c
(Accumulated depreciation transferred to Assets Account).
Question 4.
Explain determinants of the amount of depreciation.
Answer:
Factors Affecting Amount of Depreciation : Total Cost of Asset, Estimated Useful Life of Asset, Estimated Scrap Value.
a. Total cost of asset: The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing of assets and bringing the assets to their usable condition are included in the total cost of asset.
b. Estimated useful life – Every asset having it’s useful life other than it’s physical life, in terms of number of years, units, etc. are considered to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if business acquires a piece of land on lease for 25 years, it’s useful life is considered to be 25 years.
Estimated scrap value: It is estimated as the net realisable value or sale value of an asset at the end of it’s effective life. It is deducted from the total cost of an asset. For example, furniture is acquired at Rs 50,000 with it’s effective life of 10 years.
After 10 years, furniture will be sold at Rs 10,000. So, depreciation is charged as:
Depriciation (p.a.) = \(=\frac{(50,000-10,000)}{10}=\frac{40,000}{100}\) = Rs. 4,000
Question 5.
Name and explain different types of reserves in details.
Answer:
Reserves: Reserves are created for strengthening the financial positions and future growth.
It is created out of profit earned by business.
The broad classification of reserve is diagrammatically presented below.
I. Revenue Reserve: It is created out of revenue profit, i.e., revenue earned from normal activities of the business. It can be used for either general purpose or specific purpose. It is of two types:
1. General Reserve: When the reserve is created without any specified purpose, then the reserve is called general reserve. It is a free reserve and so can be used for any purpose. It can also be used for future growth and expansion. For example, reserve funds, retained earnings, contingencies reserves, etc.
2. Specific Reserve: When reserve is created for some specific purpose, then the reserve is called specific reserve.
Examples of specific reserve are given below.
- Debenture Redemption Reserve
- Investment Fluctuation Reserve
- Dividend Equalisation Reserve
- Workmen Compensation Fund
2. Capital Reserve: It is created out of capital profit, i.e:, gain from other than normal activities of business operations, such as sale of fixed asset, etc. It is created to meet the capital loss. It cannot be distributed as dividend. The example of capital reserves are given below.
- Premium on issue of shares
- Premium on issue of debentures
- Profit on redemption of debentures
- Profit on sale of fixed assets
- Profit on reissue of forfeited shares
- Profit prior to incorporation
3. Secret Reserves: Reserves that are created by overstating liabilities or understating assets are known as secret reserves. Thqy are not shown in the Balance Sheet. These reduce tax liabilities, as the liabilities are overstated. It is created by management to avoid competition by reducing profit. Creation of secret reserve is not allowed by Companies Act, 1956, which requires full disclosure of all materials facts and accounting policies, while preparing final statements.
for making provisions is to provide cushion to the future business performance against the uncertain and unforeseen losses that may arise from the past transactions. A few examples of provisions are given below.
- Provision for bad and doubtful debts
- Provision for depreciation
- Provision for taxation
- Provision for discount on debtors
Provisions are made by debiting the Profit and Loss Account on estimate basis. The provisions are created on the basis of past experiences. Every year, a business may experience common losses, such as depreciation of fixed assets, taxation, etc., which are although known; however, their exact amount of future period is unknown.
Thus, business creates provision of certain percentage every year, which is truly based on the intuitions and past experiences. These unascertained liabilities in form of provisions are kept aside, which help future business activities, undisturbed from the future losses.
Accounting treatment for provision for doubtful debts is: Profit and Loss A/c
To Provision for Doubtful Debts
(Provision for doubtful debt made)
1st PUC Accountancy Depreciation, Provisions and Reserves Numerical Questions and Answers
Question 1.
On April 01, 2010, Bajrang Marbles purchased a Machine for Rs 2,80,000 and spent Rs 10,000 on its carriage and Rs 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be Rs 20,000.
(a) Prepare Machine account and Depreciation account for the first four years by providing depreciation on straight line method. Accounts are closed on March 31st every year.
(b) Prepare Machine account, Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year.
Answer:
Question 2.
On July 01, 2010, Ashok Ltd. Purchased a Machine for Rs 1,08,000 and spent Rs 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be Rs 12,000.
Prepare machine account and depreciation Account in the books of Ashok Ltd. For first three years, if depreciation is written off according to straight line method. The account are closed on December 31st, every year.
Answer:
Working Note:
Calculation of annual depreciation
Question 3.
Reliance Ltd. Purchased a second hand machine for Rs 56,000 on October 01, 2001 and spent Rs 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for Rs 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of Rs 1,000 is expected to be incurred to recover the salvage value of Rs 6,000. Prepare machine account and Provision for depreciation account for the first three years charging depreciation by fixed instalment Method. Accounts are closed on December 31, every year.
Answer:
Question 4.
Berlia Ltd. Purchased a second hand machine for Rs 56,000 on July 01, 2011 and spent Rs 24,000 on its repair and installation and Rs 5,000 for its carriage. On September 01, 2012, it purchased another machine for Rs 2,50,000 and spent Rs 10,000 on its installation.
(a) Depreciation is provided on machinery @10% p.a on original cost method annually on December 31. Prepare machinery account and depreciation account from the year 2011 to 2014.
(b) Prepare machinery account and depreciation account from the year 2001 to 2004, if depreciation is provided on machinery @10% p.a. on written down value method annually on December 31.
Answer:
Working notes: Calculation of annual depreciation
(i) Depreciation (p.a.) on Machinery Purchased on July 01, 2001
= (56,000 + 24,000 + 5,000) × \(\frac{10}{100}\)
= Rs 8,500 per annum
(ii) Depreciation (p.a.) on Machinery purchased‘on September 01, 2002.
= (2,50,000 + 10,000) × \(\frac{10}{100}\)
= Rs 26,000 per annum
Question 5.
Ganga Ltd. purchased a machinery on January 01, 2011 for Rs 5,50,000 and spent Rs 50,000 on its installation. On September 01, 2011 it purchased another machine for Rs 3,70,000. On May 01, 2012 it purchased another machine for Rs 8,40,000 (including installation expenses).
Depreciation was provided on machinery @10% p.a. on original cost method annually on December 31. Prepare:
(a) Machinery account and depreciation account for the years 2011, 2012, 2013 and 2014.
(b) If depreciation is accumulated in provision for Depreciation account then prepare ‘ machine account and provision for depreciation account for the years 2011, 2012, 2013 and 2014.
Answer:
Question 6.
Azad Ltd. purchased furniture on October 01, 2012 for Rs 4,50,000. On March 01, 2013 it purchased another furniture for Rs 3,00,000. On July 01, 2014 it sold off the first furniture purchased in 2012 for Rs 2,25,000. Depreciation is provided at 15% p.a. on written down value method each year. Accounts are closed each year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on March 31, 2013, March 31, 2014 and March 31, 2015. Also give the above two accounts if furniture disposal account is opened.
Answer:
Question 7.
M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2011 for Rs 1,00,000. On July 01, 2012 another machine costing Rs 2,50,000 was purchased. The machine purchased on April 01, 2011 was sold for Rs 25,000 on October 01, 2015. The company charges depreciation @15% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2016.
Answer:
Question 8.
The following balances appear in the books of Crystal Ltd, on Jan 01, 2015
On April 01, 2015 a machinery which was purchased on January 01, 2012 for Rs 2,00,000 was sold for Rs 75,000. A new machine was purchased on July 01, 2015 for Rs 6,00,000.
Depreciation is provided on machinery at 20% p.a. on Straight line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2015.
Answer:
Question 9.
M/s. Excel Computers has a debit balance of Rs 50,000 (original cost Rs 1,20,000) in computers account on April 01, 2010. On July 01, 2010 it purchased another computer costing Rs 2,50,000. One more computer was purchased on January 01, 2011 for Rs 30,000. On April 01, 2014 the computer which has purchased on July 01, 2010 became obsolete and was sold for Rs 20,000. A new version of the IBM computer was purchased on August 01, 2014 for Rs 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31, 2011, 2012, 2013, 2014 and 2015. The computer is depreciated @10 p.a. on straight line method basis.
Answer:
Note: As per the solution, the closing balance, as on 31st March, 2015 is Ris 91,917; however, as per the book it is Rs 80,583.
Question 10.
Carriage Transport Company purchased 5 trucks at the cost of Rs 2,00,000 each on April 01, 2011. The company writes off depreciation @ 20% p.a. on original cost and closes its books on December 31, every year. On October 01, 2013, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay Rs 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for Rs 1,00,000 and spent Rs
20,000 on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2013. Also give truck account if truck disposal account is prepared.
Answer:
Question 11.
Saraswati Ltd. purchased a machinery costing Rs 10,00,000 on January 01,2011. A new machinery was purchased on 01 May, 2012 for Rs 15,00,000 and another on July 01, 2014 for Rs 12,00,000. A part of the machinery which originally cost Rs 2,00,000 in 2011 was sold for Rs 75,000 on October 31, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year.
Answer:
Question 12.
On July 01, 2011 Ashwani purchased a machine for Rs 2,00,000 on credit. Installation expenses Rs 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be Rs 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2011 and prepare necessary ledger accounts for first three years.
Answer:
Question 13.
On October 01, 2010, a Truck was purchased for Rs 8,00,000 by Laxmi Transport Ltd. Depreciation was provided at 15% p.a. on the diminishing balance basis on this truck. On December 31, 2003 this Truck was sold for Rs 5,00,000. Accounts are closed on 31st March every year. Prepare a Truck Account for the four years.
Answer:
Question 14.
Kapil Ltd. purchased a machinery on July 01, 2011 for Rs 3,50,000. It purchased two additional machines, on April 01, 2012 costing Rs 1,50,000 and on October 01, 2012 costing Rs 1,00,000. Depreciation is provided @10% p.a. on straight line basis. On January 01, 2013, first machinery become useless due to technical changes. This machinery was sold for Rs 1,00,000, prepare machinery account for 4 years on the basis of calendar year.
Answer:
Question 15.
On January 01, 2011, Satkar Transport Ltd, purchased 3 buses for Rs 10,00,000 each. On July 01, 2013, one bus was involved in an accident and was completely destroyed and Rs 7,00,000 were received from the Insurance Company in full settlement. Depreciation is writen off @15% p.a. on diminishing balance method. Prepare bus account from 2011 to 2014. Books are closed on December 31 every year.
Answer:
Question 16.
On October 01, 2011 Juneja Transport Company purchased 2 Trucks for Rs 10,00,000 each. On July 01, 2013, One Truck was involved in an accident and was completely destroyed and Rs 6,00,000 were received from the insurance company in full settlement. On December 31, 2013 another truck was involved in an accident and destroyed partially, which was not insured. It was sold off for Rs 1,50,000 On January 31, 2014 company purchased a fresh truck for Rs 12,00,000. Depreciation is to be provided at 10% p.a. on the written down value every year. The books are closed every year on March 31. Give the truck account from 2011 to 2014.
Answer:
Question 17.
A Noida based Construction Company owns 5 cranes and the value of this asset in its books on April 01, 2011 is Rs 40,00,000. On October 01, 2011 it sold one of its cranes whose value was Rs 5,00,000 on April 01, 2011 at a 10% profit. On the same day it purchased 2 cranes for Rs 4,50,000 each. Prepare cranes account. It closes the books on December 31 and provides for depreciation on 10% written down value.
Answer:
Question 18.
Shri Krishan Manufacturing Company purchased 10 machines for Rs 75,000 each on July 01, 210. On October 01, 2012, one of the machines got destroyed by fire and an insurance claim of Rs 45,000 was admitted by the company. On the same date another machine is purchased by the company for Rs 1,25,000.
The company writes off 15% p.a. depreciation on written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2010 to 2013.
Answer:
Note: As per the solution, the loss on sale of machine is Rs 7,335 and the closing balance, as on Dec.31, 2013, is Rs 4,85,708; however, according to the answer given in the book, the loss after insurance claimed is Rs 7,735 and the closing balance is Rs 6,30,393.
Question 19.
On January 01, 2010, a Limited Company purchased machinery for Rs 20,00,000. Depreciation is provided @15% p.a. on diminishing balance method. On March 01, 2012, one fourth of machinery was damaged by fire and Rs 40,000 were received from the insurance company in full settlement. On September 01, 2012 another machinery was purchased by the company for Rs 15,00,000.
Write up the machinery’account from 2012 to 2013. Books are closed on December 31, every year.
Answer:
Note: As per the solution, the loss by fire after adjusting claim is Rs 3,12,219; but, as per the answer given in the book the loss is Rs 12,219.
“If the amount of insurance claim received would have been Rs 3,40,000, then the loss on settle of the insurance claim would have matched with the answer given in the book.
Question 20.
A Plant was purchased on 1st July, 2010 at a cost of Rs 3,00,000 and Rs 50,000 were spent on its installation. The depreciation is written off at 15% p.a. on the straight line method. The plant was sold for Rs 1,50,000 on October 01, 2012 and on the same date a new Plant was installed at the cost of Rs 4,00,000 including purchasing value. The accounts are closed on December 31 every year.
Show the machinery account and provision for depreciation account for 3 years
Answer:
Question 21.
An extract of Trial balance frori the books of Tahiliani and Sons Enterprises on December 31 2015 is given below:
Additional Information:.
Bad Debts proved bad; however, not recorded amounted to Rs 2.000.
Provision is to be maintained at 8% of debtors
Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also, show the necessary accounts.
Answer:
Question 22.
The following information is extracted from the Trial Balance of M/s Nisha Traders on 31 December 2015.
Additional Information
Bad Debts Rs 500
Provision is to be maintained at 2% of Debtors
Prepare bad debts account, Provision for bad debts account and profit and loss account.
Answer:
