Mgt101 GDB No. 3 Solution
Friday, June 10, 2011 Posted In MGT Edit ThisOn 1st January 20X3, a company purchased a machinery having list price of Rs. 500,000 with the condition of making full payment within 15 days from the date of purchase to avail discount equal to 2% of the list price.
The company incurred transportation expenses Rs. 20,000 and insurance-in-transit Rs. 5,000. The company availed the discount & installed the machinery at the cost of Rs. 35,000.
The estimated useful economic life of the asset is 10 years with the residual value of Rs. 50,000.
Calculate:
(1)The cost of the asset to be capitalized for balance sheet purpose;
(2)The annual depreciation expense for year 20X3under straight line depreciation; &
(3)The annual depreciation expense for year 20X4under declining balance method
SOLUTION:
1. The cost of Asset to be capitalized for balance sheet=Rs.550000
(Follow Note # 1 & note # 2)
note # 1
Cost Paid to Purchase Machinery
note # 2
Cost of Asset to be capitalized for balance sheet
Cost Paid to Purchase Machinery Rs.490000
Add Transportation Expense Rs.20000
Add Insurance-in-transit Rs.5000
Add Installation ExpenseRs.35000
Cost of Asset To be Capitalized For Balance sheet Rs.550000
2. The Annual Depreciation Expense for the Year 20x3 under straight line method:
Depreciation Expense under Straight Line method= cost-residual value/n
Depreciation Expense under Straight Line method = 550000-50000/10
Depreciation Expense under Straight Line method= 500000/10
Depreciation Expense under Straight Line method = Rs.50000
List price of Machinery Rs.500,000
Less 2 % discount Rs.10000
Cost Paid to Purchase Machinery
So, Annual Depreciation Expense under Straight Line method=Rs50000
3. The Annual Depreciation Expense for the Year 20x4 under declining Balance Method
Year Particular Depreciation Written Down value
Depreciable Cost Rs.550000
20x3 550000*22% 121000 429000
20x4 429000*22% 94380 334620
Working No 3
Depreciation Rate = 1-n RV/c
Depreciation Rate =1-10 50000/550000
Depreciation Rate =1-10 .09090909
Depreciation Rate =1-.78
Depreciation Rate =22%
So, Annual Depreciation Expense for the Year 20x4 under declining Balance Method=Rs. 94380
::::::::::::::::::::::::::::::::::::::::::::::::::
Price of Machinery 500,000
Discount 10,000
Cost of Machinery 490,000
Transportation expenses 20,000
Insurance 5,000
Installation cost 35000
Total Cost of Machinery 550,000
(2)
Annual Depreciation
Cost of Machinery Rs.550,000
Residual Value Rs. 50,000
Number of years 10
So Cost of Machinery-Residual Value
Number of years
550,000-50,000
10
=50,000
Straight Line Method
Date
Particulars
Amount
Date
Particulars
Amount
Jun 1
20x3
Purchase
550,000
31 Dec
20x3
By Depreciation A/c
Balance c/d
50,000
45,000
Jun 1
20x4
Balance b/d
4,50000
(3)
Declining Method
Formula is
= 1-n RV/c
So we calculate =1-10 50000/550000
=1-10 .09090909
=1-.78
= 22%
Date
Particulars
Amount
Date
Particulars
Amount
Jun 1
20x3
Purchase
550,000
31 Dec
20x3
By Depreciation A/c
Balance c/d
121,000
429,000
Jun 1
20x4
Balance b/d
429,000
31Dec
20x4
By Depreciation A/c
Balance c/d
94,380
334,620
