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11th Standard English Medium Accountancy Subject Depreciation Accounting Book Back 3 Mark Questions with Solution Part - I

Published on: 08/06/2021

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Questions:

Generic 3

5 x 3 = 15

On 1st April 2015, Kumar purchased a machine for Rs.80,000 and spent Rs.20,000 on its installation. The residual value at the end of its expected useful life of 8 years is estimated at Rs.4,000. On 30th September 2017, the machine is sold for Rs.50,000. Depreciation is to be provided according to straight line method. Prepare Machinery Account. Accounts are closed on 31st December every year.

A firm purchased a plant on 1.1.2018 for Rs.9,000 and spent Rs.1,000 as erection charges. Calculate the amount of depreciation for the year 2018 @ 15% per annum under the written down value method. Accounts are closed on 31st March every year.

Calculate the rate of depreciation under straight line method.
Purchase price of a machine Rs. 80,000
Expenses to be capitalised Rs. 20,000
Estimated residual value Rs. 4,000
Expected useful life 4 years

Distinguish between straight line method and written down value method of providing depreciation.

State the advantages and limitations of straight line method of depreciation.

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Answers Key:

Generic 3

5 x 3 = 15

\( \text { Amount of depreciation per year } =\frac{\text { Original cost of the asset }-\text { Estimated scrap value }}{\text { Estimated useful life of the asset in years }} \)
= \(\frac{1,00,000-4,000}{8}\)
= 12,000 per year
\( \text { Rate of depreciation per year } =\frac{\text { Amount of depreciation per year }}{\text { Original cost }} \times 100\)
= \(\frac{12,000}{1,00,000}\times100\) = 12%

Note:
Cost of the asset = Purchase price + Installation cost
= 80,000 + 20,000 = Rs. 1,00,000
Ledger accounts

Dr. Machinery Account Cr.
Date	Particulars		Date	Particulars
2015 April 1	To Bank A/c	80,000	2015 Dec 31	By Depreciation A/c	9,000
April 1	To Bank A/c	20,000		(1,00,000 ×12/100 × 9/12)
			Dec 31	By Balance c/d	91,000
		1,00,000			1,00,000
2016 Jan 1	To Balance b/d	91,000	2016 Dec 31	By Depreciation A/c	12,000
				(1,00,000 ×12/100)
			Dec 31	By Balance c/d	79,000
		91,000			91,000
2017 Jan 1	To Balance b/d	79,000	2017 Sep 30	By Depreciation A/c	9,000
				(1,00,000 ×12/100 × 9/12)
			Sep 30	By Bank A/c	50,000
			Sep 30	By Profit and Loss A/c	20,000
				(Loss on sale)
		79,000			79,000

Original cost = 9,000 + 1,000 = 10,000
Rate of depreciation = 15%
Date of purchase = 1.1.2018
Number of months used = 1.1.2018 to 31.03.2018 = 3 months
Amount of depreciation = 15% on 10,000 for 3 months
= 10,000 ×15% × 3/12 = Rs.375

Amount of Depreciation = \({(Price\ of\ the\ Asset + Installation\ charges) - Scrap value\over Estimated\ life\ of\ the\ Asset}\)
\(={(80,000 +20,000) - 4, 000\over \ years}\)
\(={96,000\over 4}=Rs.24,000\)
Rate of Depreciation = \({Amount\ of\ depreciation\over Original\ Cost}\times100\)
\({24,000\over 1,00,000}\times10=24\%\)

Point of difference	Straight line method	Written down value method
1. Basis of calculation	Depreciation is calculated on the original cost of the asset for all the years.	Depreciation is calculated on the written down value of the asset year after year
2. Amount of depreciation	The amount of depreciation is the same for all the years.	The amount of depreciation goes on decreasing year after year.
3. Book value of the asset at the end of its life	The book value of the asset becomes zero when there is no scrap value or is equal to its scrap value at the end of its life.	The book value of the •asset never becomes zero.
4. Computation of rate of depreciation	It is easy to calculate the rate of depreciation.	It is very difficult to calculate the rate of depreciation.
5. Order of calculation of depreciation amount.	Amount of depreciation is calculated first, followed by the rate of depreciation.	Rate of depreciation is calculated first followed by the amount of depreciation

Merits:
Following are the merits of straight line method of depreciation:
(a) Simple and easy to understand: Computation of depreciation under this method is very simple and is easy to understand.
(b) Equality of depreciation burden: Under this method, equal amount of depreciation is debited to the profit and loss account each year.
(c) Assets can be completely written off: Under this method, the book value of an asset can be reduced to zero if there is no scrap value or to the scrap value at the end of its useful life.
(d) Suitable for the assets having fixed working life: This method is appropriate for the fixed assets having certain fixed period of working life.
Limitations:
Following are the limitations of straight line method of depreciation:
(a) Ignores the actual use of the asset: Under this method, a fixed amount of depreciation is provided, on each asset by applying the predetermined rate of depreciation on its original cost.
(b) Ignores the interest factor: This method does not take into account the loss of interest on the amount invested in the asset.
(c) Total charge on the assets will be more when the asset becomes older: With the passage of, time, the cost of maintenance of an asset goes up. Hence, the amount of depreciation and cost of maintenance put together is less in the initial period and goes up year after year.
(d) Difficulty in the determination of scrap value: It may be quite difficult to assess the true scrap value of the asset after a long period say 10 or 15 years after the date of its installation.