financial accounting mgt101 power point slides lecture 19

Financial Accounting

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Lecture – 19

Recap

• Disposal of fixed assets

• Policies for fixed assets

• Journal entries In case of straight line method Written down value method


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Lecture – 19

• In case an asset is not complete at the time preparing the balance sheet then the costs incurred on that asset till the date of balance sheet are shown in “Capital Work In Progress Account”


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Lecture – 19

• “Capital Work In Progress Account” is shown as a separate head in the balance sheet.


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Lecture – 19

• At the time of completion all the costs are transferred to fixed assets account from capital work in progress account.

• Journal entry Debit Fixed Asset (relevant account) Credit Capital Work in Progress Account


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Lecture – 19

• All costs incurred on the asset until it is brought to the state of its intended use are included in its cost.

• These costs may include: Freight Cost of assembling Financial costs Legal cost


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Lecture – 19

Example 1

• A machine costs Rs. 500,000.

• Its useful life is five years.

• At the end of five years its residual value is expected to be Rs. 31,000.

• At the end of four year the machine was sold for Rs. 50,000.

• Required. Show the calculations of depreciation for the four years

using both reducing balance and straight line method. For WDV assume depreciation rate to be 50% Calculate the profit / loss on disposal in both cases


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Lecture – 19

Example 1

• For straight line method Depreciation is calculated as follows.

• Depreciable Amount = 500,000 – 30,000 = 470,000

• Annual Depreciation = 470,000 / 4 = 117,500


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Lecture – 19

Example 1

Yr Straight Line WDV

1 Cost 500,000 Cost 500,000

Dep. (117,500) Dep. 500000 x 50% (250,000)

WDV 382,500 250,000

2 Dep. (117,500) Dep. 250000 x 50% (125,000)

WDV 265,000 WDV 125,000

3 Dep. (117,500) Dep 125,000 x 50% 62,500

WDV 147,500 WDV 62,500

4 Dep. (117,500) Dep 62,500 x 50% 31,250

WDV 30,000 WDV 31,250

Selling Price 31,000 31,000

Profit 1,000 Loss (250)


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Lecture – 19

Example 2

• Following information is available for Machinery Account in Year 4: One machine purchased on Jul 1, Year 1 for Rs. 50,000 One machine purchased on Jan 1, Year 2 for Rs. 75,000 One machine purchased on Apr 1, Year 3 for Rs.

100,000 Machine 1 is disposed off on Sep 30, Yr 4.

• Depreciation is charged at 25% reducing balance method.


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Lecture – 19

Example 2

• Show the calculations of depreciation on machinery for the four years, applying following policies: (1) Depreciation is charged on the basis of use (2) Full depreciation on the year of purchase and no

depreciation in the year of disposal.


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Lecture – 19

Year 1: One machine purchased on Jul 1, Year 1 for Rs. 50,000

• Policy 1

WDV Opening Balance 0

Purchase of Machine 50,000

50,000

Depreciation (50,000 x 25%) x 6/12 (6,250)

WDV Closing Balance 43,750


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Lecture – 19

Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000

• Policy 1

WDV Opening Balance 43,750

Purchase of Machine 75,000

118,750

Depreciation (118,750 x 25%) (29,688)



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Lecture – 19

Year 3: One machine purchased on Apr 1, Year 3 for Rs. 100,000

• Policy 1


Purchase 100,000

189,062

Depreciation (89,062 x 25%) (22,265)

Depreciation (100,000 x 25%) x 9 / 12 (18,750)



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Lecture – 19

Year 4: Machine 1 is disposed off on Sep 30, Year 4

• Policy 1


Dep. Machine 1 (4,614)

Dep. Others (148,047 – 24,609) x 25% (30,860)

112,573

WDV of Asset Disposed (19,995)



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Lecture – 19

• WDV of machine sold in Year 4:

Cost Year 1 50,000

Dep. Year 1 (50000 x 25 %) 6/12 6,250

WDV Year 1 43,750

Dep. Year 2 (43750 x25%) 10,938

WDV Year 2 32,812

Dep. Year 3 (32,812 x 25%) 8,203

WDV Year3 24,609

Dep. Year 4 (24,609 x 25%) x 9 / 12 4,614

WDV Year4 19,995


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Lecture – 19

Year 1: One machine purchased on July 1, Year 1 for Rs. 50,000

• Policy 2

WDV Opening Balance 0

Purchase Cost 50,000

50,000

Dep. (50,000 x 25%) (12,500)



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Lecture – 19

Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000

• Policy 2



112,500

Dep. (112,500 x 25%) (28,125)



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Lecture – 19

Year 3: One machine purchased on Apr 1, Year 3 for Rs. 100,000

• Policy 2



184,375

Dep. (184,375 x 25%) (46,094)



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Lecture – 19

Year 4: Machine 1 is disposed off on Sep 30, Year 4

• Policy 2


WDV of Disposed Off Machine (21,094)

117,187

Dep. (117,187 x 25%) (29,297)



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Lecture – 19

Machine Disposed Off in Year 4

Cost Year 1 50,000

Dep. Year 1 (50000 x 25 %) 12,500

WDV Year 1 37,500

Dep. Year 2 (37500 x25%) 9,375

WDV Year 2 28,125

Dep. Year 3 (28,125 x 25%) 7,031

WDV Year 3 21,094


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Lecture – 19

Example 3

• A machine costs Rs. 500,000.

• Its useful life is five years.

• At the end of five years its residual value is expected to be Rs. 30,000.

• At the end of four year the machine was sold for Rs. 31,000.

• Depreciation is charged on the basis of use.


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Lecture – 19

• Required. Show the calculations of depreciation for the four years

using both reducing balance and straight line method. For WDV assume depreciation rate to be 50% Calculate the profit / loss on disposal in both cases


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Lecture – 19

Straight Line Method

Depreciable Amount = 500,000 – 30,000 = 470,000

Annual Depreciation = 470,000 / 4 = 117,500

Annual Depreciation = 470,000 / 5 = 94,000


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Lecture – 19

Written Down Value Method

Year Written Down Value Method Rs.

1 Cost 500,000

Dep. 500,000 x 50% (250,000)

Written Down Value 250,000

2 Dep. 250,000 x 50% (125,000)


3 Dep. 125,000 x 50% 62,500


4 Dep. 62,500 x 50% 31,250


Selling Price 31,000

Loss On Disposal (250)


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Lecture – 19

Straight Line Value Method

Year Straight Line Method Rs.

1 Cost 500,000

Depreciation (94,000)


2 Depreciation (94,000)






Selling Price 31,000

Loss on Disposal 93,000

financial accounting mgt101 power point slides lecture 19

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