0438 Assignment no 1 Solution 2022-Autumn 2022-Q 4 Ans-AIOU-Principles of accounting
Q. 4
On 1st July 2015, Zahid purchased Machinery for Rs. 600,000. Depreciation is to be charged @ 10% on straight line method and reducing balance method each year. On 31st October, 2017 Machinery was sold for Rs. 140,000 as they became useless. On the same date he purchased new machinery for Rs. 200,000.
Required
Prepare machinery accounts from 2015 to 2018. Accounts are closed on 31st December every year.
#digilearnerspoint, reducing balancing method, straight line method, salvage value, residual value, depreciation expense, book value, depreciation rate,
carrying value, carrying amount, trade in value
Q. 4
On 1st July 2015, Zahid purchased Machinery for Rs. 600,000. Depreciation is to be charged @ 10% on straight line method and reducing balance method each year. On 31st October, 2017 Machinery was sold for Rs. 140,000 as they became useless. On the same date he purchased new machinery for Rs. 200,000.
Required
Prepare machinery accounts from 2015 to 2018. Accounts are closed on 31st December every year.
#digilearnerspoint, reducing balancing method, straight line method, salvage value, residual value, depreciation expense, book value, depreciation rate,
carrying value, carrying amount, trade in value
Category
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LearningTranscript
00:00Bismillahirrahmanirrahim, Assalamualaikum, dear friends and students, welcome to my YouTube
00:06channel Digi Learning Points.
00:07In today's video tutorial, we will try to solve the question number 4 of the first assignment.
00:24Let's start reading the question number 4.
00:27Then we will go to the requirement and finally we will move to the solution.
00:33Let's start.
00:34Question number 4.
00:35On 1st July 2015, Zaid purchases machinery for Rs. 600,000.
00:40Depreciation is to be charged at 10% on straight line method and reducing balance method each
00:46year.
00:47In my opinion, for the sake of understanding, they have asked you, Mr. Zaid and his company
00:57maintaining a schedule of depreciation on the basis of two methods.
01:01But in reality, either you can use straight line method or reducing balance method.
01:07The both methods cannot be applied by a company on the same time.
01:11But what I perceive from the question, it is just for the sake of giving you the more
01:17detailed understanding of the two methods regarding the depreciation.
01:22So, on 31st October 2017, please be careful and give more attention on the date.
01:31Machinery was sold for Rs. 140,000.
01:35The machine was purchased on 1st July 2015 with the cost Rs. 600,000.
01:42As they become useless, because they become obsolete, on the same date he purchased new
01:48machinery for Rs. 200,000 and when he sold the old machine, he will purchase a new machine
01:55on the same date, means 31st October 2017.
02:00Now, let's start the requirements.
02:05Prepare machinery accounts from 2015 to 2018.
02:09Accounts are closed on 31st December every year.
02:13So, for your information, I am going to tell you that I have prepared the solution on Excel for convenience.
02:21But you go as per your prescribed instructions to solve this question.
02:30So, here is the solution.
02:33So, as two methods of depreciation has been asking for us, from us to be prepared.
02:42So, here is the first schedule under the method of reducing balance method or diminishing balance method.
02:48Schedule is here, date.
02:50Here is the, every year we are going to be depreciated on 31st December 2015.
02:59So, I am going to mention this date.
03:01So, the cost of the asset is Rs. 600,000.
03:04If there is a residual value or salvage value, so we are going to depreciable cost.
03:09By subtracting the salvage value from the cost of the asset.
03:13So, depreciation is 0.10, 0.10, 0.10.
03:17So, depreciation expense is equal to 0.10 into Rs. 600,000 and you will get the value for one year.
03:26But we are going to be charged this for the six months, means half year.
03:32So, I am going to divide this by two.
03:34So, I will get the, this amount Rs. 30,000 depreciation expense for the six months of the year 2015.
03:48So, 31st December 2015, I am going to be record this amount of depreciation expense and engage the cumulative depreciation.
03:58The same year 30,000, it will remain same.
04:01So, book value, sorry, balance at the end will be obtained by subtracting this depreciation expense from the cost.
04:13So, we will get Rs. 570,000 balance or book value at the end of the year.
04:18We will, as the method is diminishing balancing method or reducing balancing method.
04:23Now, this is a reducing balancing method.
04:25It will become the opening balance of the 31st, 1st January 2016.
04:32But we are dealing with the depreciation closing at the year end.
04:37So, we are going to use the date 31st December 2016.
04:40So, this is the amount here.
04:41Again, we are going to apply the same way 0.10.
04:45So, we will get the Rs. 57,000 depreciation expense on balance sheet date.
04:51And accumulated depreciation is how we are getting this figure Rs. 87,000 under that column accumulated.
04:59Rs. 30,000 plus Rs. 57,000, it will be equal to Rs. 87,000.
05:03And the balance at the end of the year is equal to Rs. 57,000 must be subtracted from the Rs. 570,000.
05:16So, we will get this.
05:17Otherwise, you will go from here Rs. 57,000 minus Rs. 57,000.
05:22You will get Rs. 513,000.
05:25Again, we are going to apply the same rate.
05:27We will get Rs. 43,750.
05:30The reason is that we are going to calculate it for 10 months, not for the whole year.
05:35Because we have sold it on 31st October 2017.
05:38So, we are going to make calculation here for the sake of easiness and understanding.
05:49So, here I am going to show the formula.
05:52So, look at this.
05:53I am going to multiply C25.
05:56This is C25.
05:59This one into B25.
06:01This one into 10 by 12.
06:03So, this will get the amount and Rs. 42,750.
06:07And we will add this into Rs. 87,000.
06:10Rs. 129,750.
06:12So, by subtracting this amount from this, we will get Rs. 470,250.
06:22So, at that day, our book value of the asset is Rs. 470,250.
06:29On the same date, we are going to purchase a new machine of cost Rs. 200,000.
06:33And we are going to use the same depreciation rate Rs. 0.10.
06:38And it is for the two months, so Rs. 3,333.33.
06:45And it is accommodated for the new machine is Rs. 3,333.33.
06:50And the remaining amount of book value is Rs. 196,667 approximately.
06:56So, in the next year, we are going to record it for the whole year.
07:00So, for the whole year, it is Rs. 19,000.
07:03On the basis of this balance, the book value of the asset at the end of the year,
07:11Rs. 35,218 is Rs. 177,000.
07:17As we know that the company has sold out the...
07:26Now, the book value has been taken from the schedule regarding from the sold machine which is equal to Rs. 470,250.
07:35Sell value is Rs. 140,000.
07:41And loss on sale of the machine is equal to book value minus sell value is equal to Rs. 330,250.
07:48And these are the methods of reducing balance method of depreciation.
07:52So, we will pass this general entry.
07:54Cash count.
07:56Cash count means that the amount that you have received in this asset.
08:02Rs. 140,000 loss on sale of machine which we have taken from here.
08:06And accumulated depreciation that we have got from the column of accumulated from the schedule.
08:13So, to machinery account, old is equal to Rs. 600,000.
08:17To cash account is equal to Rs. 100,000.
08:19It is a compound entry on the same day.
08:22So, let's move to the other method which is card straight line method and schedule is here.
08:28Remember, in previous method, we are going to calculate depreciation on the reducing balance.
08:34But here, please keep in mind that the amount of depreciation for the current year is remain same.
08:41Although the book value is reduced by the same amount, but the amount doesn't decrease as you have witnessed in the previous case.
08:49See, depreciation amount Rs. 30,000, Rs. 50,000, Rs. 42,000.
08:53But here, you will observe that the amount of depreciation is remain same.
08:59But it will be changed as per the proportion of the use in the current year.
09:03So, come to the, this is the same amount.
09:09So, accumulated depreciation, so you should correct it here, Rs. 30,000, Rs. 30,000.
09:17So, and it should be Rs. 30,000.
09:27Yes, now it is correct.
09:31Because we have used this machine for 6 months, so we are taking half of the value of the Rs. 60,000 which is equal to Rs. 30,000.
09:40And again subtracting this Rs. 60,000 minus Rs. 30,000, we will get Rs. 570,000.
09:47Remember that, this is our book value.
09:51But our depreciation of the asset remains same for the current year, Rs. 60,000.
09:59So, it will add back to Rs. 30,000 to get Rs. 90,000, the accumulated depreciation.
10:04So, now we are going to minus Rs. 60,000 from Rs. 570,000, it is equal to Rs. 510,000.
10:13If you compare it with the previous one, here is Rs. 513,000.
10:17So, here is Rs. 510,000.
10:20Again, we will deduct the same amount in the next year, but in the year 2017, we are going to sold out that one.
10:28And we will use this machine for the next 10 months.
10:30So, this is the portion that we have used to be here.
10:35Here, let me get Rs. 50,000 into Rs. 510,000 into Rs. 512,000.
10:54I don't know which amount will come.
10:57So, Rs. 50,000 and Rs. 50,000 is going to be added here.
11:06Rs. 90,000 plus Rs. 50,000.
11:11And this is Rs. 140,000.
11:16So, the accumulated depreciation is Rs. 140,000.
11:19And here is the book value of the asset at the end of the year under the deadline method, Rs. 460,000.
11:27So, we will get Rs. 320,000.
11:34So, here is the increase.
11:36We are going to determine the loss.
11:38Again, the same method.
11:40This is our book value, Rs. 460,000.
11:44Sale value, Rs. 140,000.
11:46Subtract it from the book value.
11:47We will get the loss, Rs. 320,000.
11:49I am going to machine it with the red color.
11:53So, this is the entry that is related to the expense and the day on the sale of the asset.
12:00Depreciation expense upon accumulated depreciation.
12:02Accumulated depreciation must be subtracted from the asset account in the balance sheet
12:08on the date of closing.
12:11This is the cash with that on the 31st October, 2017.
12:16So, cash if we see this one, accumulated depreciation Rs. 140,000.
12:21Loss of sale of machine is Rs. 320,000 and which is equal to the total cost of the machine.
12:30Now, we are going to discuss the machine account under reducing balance method.
12:35We already discussed the schedule of the depreciation expenses under the two methods.
12:40Reducing balance method and straight line method.
12:43But, now I am going to discuss with you the machine account under reducing balance method.
12:49Look at this.
12:51This is the first year 2015 to cash account Rs. 60,000 at 31st December, 2015.
12:56Depreciation expense Rs. 30,000 which is for the 6 months.
13:02So, for the whole year is with the rate of 10% is Rs. 60,000 and for the 6 months it is Rs. 30,000.
13:09So, balance by balance brought down is equal to Rs. 570,000.
13:15Now, as it is prepared under the method of reducing balance method.
13:19So, look at this.
13:22We are going to be taking this amount as the opening balance of the year 2016 on 1st January, 2016.
13:31Rs. 570,000.
13:32So, now rate is applied on this amount rather than this.
13:37Rather than keeping it constant as we discussed in the straight line method.
13:44In coming video, we have also discussed the machine account for the straight line method.
13:50So, Rs. 570,000 is here.
13:52So, 10% is Rs. 57,000 and by balance brought down is equal to Rs. 513,000.
14:00So, total is same.
14:02Now, opening balance now in the year of 2017 has been started.
14:07The opening balance carried down from the last year.
14:10Last year the closing balance becomes the opening balance and the rate of interest.
14:15As we are going to record the depreciation expense on the closing rate.
14:22So, we have sold this machine on 31st October.
14:27So, we are going to record the transaction or general entry on 31st October, 2017.
14:34So, what happened here?
14:37Depreciation expense is Rs. 42,750 which is taken from the
14:41which is taken from this amount by charging 10% but for the 10 months.
14:52So, look at the formula is here as I have calculated in the schedule.
15:00So, I have taken it from the schedule by cash Rs. 140,000 by loss on sale of machine.
15:06So, look at this if you look at the sum of these three rows it will be equal to Rs. 513,000.
15:16So, on the same day we are going to purchase a new machine which is Rs. 200,000
15:22and depreciation expense of this machine for the two months is Rs. 3,333.33.
15:30So, balance brought down is equal to Rs. 196,667 and on the opening day of the year 2018 it will be here.
15:40So, on closing date its depreciation expense is equal to Rs. 19,667 under the reducing method.
15:49So, we will get this balance amount which will be carried towards the next year.
15:57Now, come to the machine account which has been made under the method of straight line method.
16:06The first entry is same as we have recorded in the machine account under the method of reducing balance method Rs. 30,500.
16:20Now, come to the next year on 1st January 2016 and the balance is here which is also known as book value on 31st December 2016.
16:34So, in this case we are going to charge a fixed amount of fixed installment of the Rs. 60,000.
16:40So, we are not going to record the depreciation amount on the reduce.
16:46So, as it is a straight line method so we directly charge Rs. 60,000.
16:50So, Rs. 60,000 is here so we will subtract Rs. 60,000 from Rs. 570.
16:55We will get Rs. 510,000 and the total is Rs. 570,000 and Rs. 570,000.
17:03Now, the year 2000 has been started on 1st January 2017.
17:08The opening balance carried down from the last year which is the closing balance at that time.
17:14Here Rs. 510,000 depreciation expense because we have sold out this machine on 35th September 2017.
17:21So, depreciation expense has been charged for the 10 months rather than 12 months.
17:25So, this is the amount that we have charged here.
17:28How we calculate this? Look at this Rs. 60,000 into 9 by 12.
17:32So, this is the amount by cash Rs. 140,000 by loss on sale of machine under straight line method which is equal to Rs. 320,000.
17:41But here we look at this under the reducing balance method it is Rs. 330,250.
17:48So, on the same day we are going to purchase a new machine of amount Rs. 200,000.
17:55So, by depreciation expense it has been cleared from here.
17:58So, we have charged this depreciation on the 35th December 2017 which is equal to Rs. 3333.33.
18:08Balance is Rs. 196,000.
18:10Look at this the balance is same under the both methods.
18:13So, year 2018 the expense amount is charged depreciation expense is charged equal to Rs. 20,000.
18:26It will not be changed.
18:27Also, the book value of the asset will be going to be diminishing over the period of the years.
18:35So, this is the total amount.
18:38So, I hope you will understand this question.
18:41If you have any question please ask me in comment section.
18:43If you want to correct me at any point of this session please come up with your suggestions in comment section.
18:51Thanks for watching.
18:52Assalamualaikum.