On 1.1.2013, a machine was purchased for ₹ 1,00,000, installation charges being ₹ 5,000. The estimated life of the machine is three years and it fetches a scrap value of ₹ 12,000. Depreciation is written off under fixed installment method. On 31.12.2015, the machine was sold for ₹ 18,000 and on the same day a new machine was purchased for ₹ 2,00,000. Show machine account for three years when books of accounts are closed on 31st December.
Answer (2)
To solve this problem, we'll calculate the annual depreciation and then display the machine account over the three-year period.
Step 1: Calculate Annual Depreciation
Using the Fixed Installment Method (also known as Straight-Line Depreciation Method), the formula to calculate annual depreciation is:
Annual Depreciation = Life of the Machine in Years Cost of the Machine + Installation Charges - Scrap Value
Given:
Cost of Machine = ₹ 1,00,000
Installation Charges = ₹ 5,000
Scrap Value = ₹ 12,000
Life of the Machine = 3 years
Plug these values into the formula:
Annual Depreciation = 3 1 , 00 , 000 + 5 , 000 − 12 , 000 = 3 93 , 000 = ₹31 , 000
Step 2: Show Machine Account
Let's prepare the machine account for the three years ending on December 31.
Machine Account
Year 2013
Jan 1: Purchase = ₹ 1,05,000 (₹ 1,00,000 + ₹ 5,000)
Dec 31: Less Depreciation = ₹ 31,000
Balance carried down = ₹ 74,000
Year 2014
Jan 1: Balance brought down = ₹ 74,000
Dec 31: Less Depreciation = ₹ 31,000
Balance carried down = ₹ 43,000
Year 2015
Jan 1: Balance brought down = ₹ 43,000
Dec 31: Less Depreciation = ₹ 31,000
Balance before sale = ₹ 12,000
Sale: Machine sold for ₹ 18,000
Profit on Sale = ₹ 18,000 (Sale Proceeds) - ₹ 12,000 (Book Value on Sale Date) = ₹ 6,000
New Machine Purchase
Dec 31, 2015: New Machine purchased for ₹ 2,00,000.
The machine account balance on December 31, 2015, stands at ₹ 2,00,000, which is the cost of the new machine purchased.
This concludes the machine account for the three years.
The annual depreciation for the machine is calculated to be ₹ 31,000 using the fixed installment method. The machine account is prepared for three years, with the machine sold for ₹ 18,000 at the end of year three, leading to the purchase of a new machine for ₹ 2,00,000. The account balances reflect the depreciation and sale transactions accurately.
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