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DEPRECIATION OF FIXED ASSETS-2
THE PROVISION FOR DEPRECIATION
SPECIMEN QUESTION
On 1st January 1998 a company purchased a motor van of cost of Tshs 160,000. It was decided on that date to provide for depreciation on the van at the rate of 25% per annum using straight line method. Show the relevant entries in the company’s books for the first three years. Show also balance sheet extracts.
DR | LEDGER MOTOR VAN A/C | CR | ||||
Date | particulars | Amount | Date | particulars | f | Amount |
1/1/1998 | cash | 160,000 | 31/12/1998 | balance c/d | 160,000 | |
1/1/1999 | balance | 160,000 | 31/12/1999 | balance c/d | 160,000 | |
1/1/2000 | balance | 160,000 | 31/12/2000 | balance c/d | 160,000 | |
1/1/2001 | balance | 160,000 | ||||
DR PROFIT AND LOSS ACCOUNT ASSET FOR THE YEAR ENDED 31DEC. CR | ||||
31/12/1998 | Motor prov.Depreciation | 40,000 | ||
31/12/1999 | Motor prov.Depreciation | 40,000 | ||
31/12/2000 | Motor prov.Depreciation | 40,000 | ||
BALANCE SHEET AS AT 31DEC.
LIABILITIES | ASSETS | |||||
FIXED ASSETS | ||||||
1998 | Motor van | 160,000 | ||||
less: depreciation | 40,000 | 120,000 | ||||
1999 | Motor van | |||||
less: depreciation | 80,000 | 80,000 | ||||
2000 | Motor van | 160,000 | ||||
less: depreciation | 120,000 | 40,000 | ||||
MODERN METHOD
Again we will use previous example. Machines 6,000 on 1st January 1991 and being depreciated at 10% each year using the diminishing balance method for the first three years.
Required
(i) Machinery A/C
(ii) Provision for depreciation
(iii) Profit and loss A/C
(iv) Extracted balance sheet
WORKING.
Machinery at cost 1991 | 6,000 | |
Less depreciation 6000 10/100 | 600 | |
Net book value for 31/12/1991 | 5,400 | |
Less depreciation 1992 – 5400 10/100 | 540 | |
Net book for 31/12/1992 | 4,860 | |
Less depreciation 1993 4860 10/100 | 486 | |
Net book value for 31/12/1993 | 4,374 | |
DR MACHINERY A/C CR
Date | particulars | f | amount | date | particulars | f | amount | |
1/1/1991 | cash | 6000 | 31/12/1991 | balance c/d | 6000 | |||
1/1/1992 | balance b/d | 6000 | 31/12/1992 | balance c/d | 6000 | |||
1/1/1993 | balance b/d | 6000 | 31/12/1993 | balance c/d | 6000 | |||
1/1/1994 | balance b/d | 6000 |
DR PROVISION FOR DEPRECIATION A/C CR
Date | particulars | amount | Date | particulars | amount | |
31/12/1991 | Balance c/d | 600 | 31/12/1991 | profit & loss A/C | 600 | |
Dec-92 | Balance c/d | 1140 | 1/1/1992 | balance b/d | 600 | |
31/12/1992 | profit & loss | 540 | ||||
1140 | 1140 | |||||
31/12/1993 | balance c/d | 1628 | 1/1/1993 | balance b/d | 1140 | |
31/12/1993 | profit & loss | 486 | ||||
1626 | 1626 | |||||
1/1/1994 | balance b/d | 1626 |
DR PROFIT AND LOSS ACCOUNT ASSET FOR THE YEAR ENDED 31DEC. CR | ||||
31/12/1991 | prov.Depreciation | 600 | ||
31/12/1992 | prov.Depreciation | 540 | ||
31/1993 | prov.Depreciation | 486 | ||
BALANCE SHEET AS AT 31ST DEC
LIABILITIES | ASSETS | |||||
FIXED ASSETS | ||||||
1991 | MACHINE | 6,000 | ||||
less: Depreciation | 600 | 5,400 | ||||
1992 | MACHINE | 6,000 | ||||
less: Depreciation | 1,140 | 4,860 | ||||
1993 | MACHINE | 6,000 | ||||
less: Depreciation | 1,628 | 4,374 | ||||
EXAMPLE
Mwanamali and Bwana Fukara , they purchase motor vehicle for bread delivery cost Tshs 900,000 come to you to help them to depreciate the asset by both method where will be kept four years and then will be disposed for an estimated amount of Tshs 100,000 . For the reducing balance method a percentage figures of 50%.
Formula;-
Therefore accumulated depreciation is 200,000/=
Workings:-
STRAIGHT LINE METHOD | REDUCING BALANCE METHOD | ||
Motor vehicle | 900,000 | motor van | 900,000 |
less depreciation 1st year | 200,000 | less depreciation | 450,000 |
net book value | 700,000 | net book value | 450,000 |
less depreciation 2nd year | 200,000 | less Depreciation | 225,000 |
net book value | 500,000 | net book value | 225,000 |
less depreciation 3rd year | 200,000 | less Depreciation | 112,500 |
net book value | 300,000 | net book value | 112,500 |
less depreciation 4th year | 200,000 | less Depreciation | 56,250 |
net book value | 100,000 | 55,250 |
DR MOTOR VEHICLE A/C CR
Date | particulars | f | amount | Date | particulars | f | Amount | |
1/1 | cash | 900,000 | 31/12 | balance c/d | 900,000 | |||
1/1 | balance b/d | 900,000 | 31/12 | balance c/d | 900,000 | |||
1/1 | balance b/d | 900,000 | 31/12 | balance c/d | 900,000 | |||
1/1 | balance b/d | 900,000 | 31/12 | balance c/d | 900,000 |
DR ACCUMULATED DEPRECIATION A/C CR
Date | particulars | f | amount | particulars | f | amount | |
31-Dec | balance c/d | 200,000 | 31-Dec | profit & loss | 200,000 | ||
31-Dec | balance c/d | 400,000 | 1ST JAN | 200,000 | |||
31-Dec | profit & loss | 200,000 | |||||
400,000 | 400,000 | ||||||
31-Dec | balance c/d | 600,000 | balance b/d | 400,000 | |||
31-Dec | profit & loss | 200,000 | |||||
600,000 | 600,000 | ||||||
31-Dec | balance c/d | 800,000 | 1ST JAN | balance b/d | 600,000 | ||
31-Dec | profit & loss | 200,000 | |||||
800,000 | 800,000 | ||||||
1ST JAN | balance b/d | 800,000 |
DR PROFIT AND LOSS ACCOUNT ASSET FOR THE YEAR ENDED 31DEC. CR | |||||||||||
31/12 | prov.Depreciation | 200,000 | |||||||||
31/12 | prov.Depreciation | 200,000 | |||||||||
31/12 | prov.Depreciation | 200,000 | |||||||||
BALANCE SHEET AS AT 31DEC.
LIABILITIES | ASSETS | |||||
FIXED ASSETS | ||||||
Motor vehicle | 900,000 | |||||
less: depreciation | 200,000 | 700,000 | ||||
900,000 | ||||||
less: depreciation | 400,000 | 500,000 | ||||
Motor vehicle | 900,000 | |||||
less: depreciation | 600,000 | 300,000 | ||||
Motor vehicle | 900,000 | |||||
less: depreciation | 800,000 | 100,000 | ||||
DIMINISHING METHOD.
DR | PROVISION FOR DEPRECIATION A/C | CR | |||||
Date | f | Amount | Date | Particulars | f | Amount | |
balance c/d | 450,000 | 31-Dec | profit & loss A/C | 450,000 | |||
balance c/d | 675000 | 31-Dec | balance b/d | 450,000 | |||
31-Dec | profit & loss A/C | 225,000 | |||||
675,000 | 675,000 | ||||||
balance c/d | 787500 | 31-Dec | balance b/d | 675,000 | |||
31-Dec | profit & loss A/C | 112,500 | |||||
787,500 | 787,500 | ||||||
balance c/d | 843,750 | 31-Dec | balance b/d | 787,000 | |||
31-Dec | profit & loss A/C | 56,250 | |||||
843,750 | 843,750 | ||||||
31-Dec | balance b/d | 843,750 | |||||
DR | PROFIT & LOSS A/C FOR THE YEAR ENDED 31/12 | CR | |||||
31-Dec | provision deprecation | 450,000 | |||||
31-Dec | provision deprecation | 225,000 | |||||
31-Dec | provision deprecation | 112,500 | |||||
31-Dec | provision deprecation | 56,250 | |||||
EXTRACTED BALANCE SHEET FOR THE YEARS ENDED 31/12 | |||||||
LIABILITIES | ASSETS | ||||||
FIXED ASSETS | |||||||
motor vehicle | 900,000 | ||||||
less: provision depreciation | 450,000 | 450,000 | |||||
motor vehicle | 900,000 | ||||||
less: provision depreciation | 675,000 | 225,000 | |||||
motor vehicle | 900,000 | ||||||
less: provision depreciation | 787,500 | 112,500 | |||||
motor vehicle | 900,000 | ||||||
less: provision depreciation | 843,750 | 56250 | |||||
DISPOSAL OF ASSET
This is when the firm decides to resale the asset after depreciation or due to some certain conditions.
The firm may decide to resale the asset after they have depreciated because the assets are no longer productive.
Example
A firm bought a machine for Tshs 500,000. it is expected to be used for 4 years and then sold for Tshs 90,000 . Prepare the a/c show the effect.
WORKINGS;-
Depreciation =Cost of Asset – scrap value/disposal value Number of the year |
= 410,000/4 = 102,500
The depreciation for each year is 102,500.
DR | MACHINE ACCOUNT | CR | |||||
Date | Particulars | f | Amount | Date | Particular | f | Amount |
year 1 | cash | 500,000 | year 1 | balance c/d | 500,000 | ||
year 2 | balance b/d | 500,000 | year 2 | balance c/d | 500,000 | ||
year 3 | balance b/d | 500,000 | year 3 | balance c/d | 500,000 | ||
year 4 | balance b/d | 500,000 | year 4 | Disposal | 500,000 | ||
DR PROVISION FOR DEPRECIATION A/C CR
Date | Particulars | f | Amount | Date | Particular | f | Amount |
31-Dec | balance c/d | 31/12/1991 | profit & loss A/C | 102,500 | |||
31-Dec | balance c/d | 205,000 | 31/12/1992 | balance b/d | 102,500 | ||
31/12/1992 | profit & loss A/C | 102,500 | |||||
205,000 | 205,000 | ||||||
31-Dec | balance c/d | 307,500 | 31/12/1993 | balance b/d | 205,000 | ||
31/12/1993 | profit & loss A/C | ||||||
307,500 | 307,500 | ||||||
31-Dec | Disposal | 410,000 | 31/12/1994 | balance b/d | 307,500 | ||
31/12/1994 | profit & loss A /C | 102,500 | |||||
410,000 | 410,000 | ||||||
DR | DISPOSAL OF MACHINE ACCOUNT | CR | ||||||||||
Date | Particular | f | Amount | Date | Particular | f | Amount | |||||
31/12/1994 | machine | 500,000 | 31/12/1994 | provision depreciation | 410,000 | |||||||
31/12/1994 | cash | 90,000 | ||||||||||
500,000 | 500,000 | |||||||||||
