Solutions-Class-11-Commerce-Book Keeping and Accountancy-Chapter-7-Depreciation-Maharashtra Board

Depreciation is the gradual, continuous, and permanent reduction in the value of a fixed asset due to wear and tear, passage of time, or obsolescence.

Depreciation is charged to ascertain the true profit or loss of the business, show the correct value of assets, and make provision for their future replacement.

Scrap Value is the estimated net realisable value of a fixed asset at the end of its useful economic life, after deducting disposal and removal costs.

Depreciation is charged even in a loss year because it is a permanent reduction in asset value that occurs regardless of whether the business earns a profit or suffers a loss.

The Asset Account is credited when depreciation is charged (Depreciation A/c is debited and the respective Asset A/c is credited).

The profit or loss on sale of an asset is transferred to the Profit and Loss Account at the end of the accounting year.

The balance of the Depreciation Account is transferred to the Profit and Loss Account at the end of the accounting year.

Depreciation (p.a.) = \(\frac{\text{Original Cost - Scrap Value}}{\text{Estimated Life of Asset (in years)}}\)

Fixed Instalment Method (also called Straight Line Method) is a method in which an equal, fixed amount of depreciation is charged on the original cost of the asset every year throughout its useful life.

The Machinery Account (Asset Account) is debited when installation expenses are paid, as they form part of the original cost of the asset

(1) A continuous, gradual and permanent reduction in the value of a fixed asset: Depreciation:

(2) The expenditure incurred for purchase, installation charges etc. of an asset: Original Cost (or Historical Cost):

(3) The amount that a fixed asset is expected to realize on its disposal at the end of its economic life: Scrap Value (or Terminal/Residual Value)

(4) The period for which the asset remains in working condition and provides expected utility to the business: Estimated Economic Life (or Useful Life)

(5) The method of depreciation in which the total depreciation is equally spread over the life of the asset, making the annual charge constant: Straight Line Method (or Fixed Instalment Method).

(6) The method of depreciation in which the rate of depreciation is fixed but the amount of depreciation reduces every year as it is calculated on the opening balance of each year: Written Down Value Method (or Diminishing Balance Method).

(7) The type of asset on which depreciation is charged (with the notable exception of Land): Fixed Assets.

(8) Expenses incurred for fixation of the new asset to bring it into working condition: Installation Charges (or Incidental Charges.

(9) Excess of the selling price of a fixed asset over its Written Down Value: Profit on Sale of Asset.

(10) The method of depreciation that cannot reach zero value, unlike the Straight Line Method: Written Down Value Method.

(a) Depreciation

(a) Fixed

(b) Capital

(b) Scrap value

(b) Written Down Value Method

(a) Straight Line Method

(c) Profit & Loss A/c

Statement is : True

Reason: Depreciation is defined as the continuous and permanent reduction in the value of fixed assets (except land) due to factors like wear and tear, actual use, or the passage of time.

Statement is : False

Reason: Depreciation represents the shrinkage, deterioration, or reduction in the value of an asset, not an increase.

Statement is : True

Reason: Depreciation is an element of cost and a non-cash expenditure; therefore, at the end of the accounting year, its balance is transferred to the Profit and Loss Account as a charge against revenue.

Statement is : True

Reason: To find the true profit or loss on a sale, depreciation must be charged for the period from the start of the year until the actual date of sale to determine the current book value (Written Down Value) at that moment.

Statement is : False

Reason: Expenses incurred for the fixation or installation of a new asset, such as wages for fixation, are considered part of the original cost of the asset and must be debited to the Asset (Machinery) Account.

Statement is : False

Reason: Assets lose value over time due to the passage of time (effluxion of time), even if they are not in active use; therefore, it is necessary to depreciate them regardless of usage.

Statement is : False

Reason: Depreciation is specifically the process of spreading the cost of fixed assets over their useful life. The working life decreases for all fixed assets except land.

Statement is : False

Reason: Depreciation is a mandatory charge against revenue to ascertain the true income of a business. It must be charged every year whether the business earns a profit or suffers a loss.

(1) Depreciation is charged on Fixed asset.

(2) Wages paid for Installation / fixation of Machinery is debited to Asset (or Machinery) account.

(3) Under Written Down Value (or Reducing Balance) system, the amount of depreciation changes every year.

(4) Depreciation = \(\frac{\text{Cost of Asset Less Scrap Value}}{\text{Estimated Working Life of Asset (in years)}}\)

(5) Gradual and permanent decrease in the value of asset is known as Depreciation.

(6) In Fixed Instalment System the amount of depreciation is constant (or same) every year.

(7) The amount spent on installation of Machinery is a Capital expenditure.

(8) Scrap Value (or Residual Value) is the value which an asset realises at the end of its useful life.

(9) Depreciation Account is a Nominal account.

(10) Depreciation is derived from a Latin word ‘Depretium’.

(1) agree (2) disagree (3) agree (4) disagree (5) agree

Residual value of an asset decreases (or reduces) the amount of annual depreciation.

Reason: According to the formula for the Straight Line Method, Scrap (Residual) Value is subtracted from the Original Cost. Therefore, a higher residual value results in a lower depreciable amount.

Depreciation is calculated on fixed assets (except land).

Reason: The sources specify that depreciation is the reduction in value of fixed assets due to wear and tear or use. It specifically notes that land is an exception and is never depreciated.

Under written down value method, depreciation is calculated on the reducing balance (or opening balance) of an asset.

Reason: Unlike the Straight Line Method which uses the Original Cost, the Written Down Value Method calculates depreciation at a fixed percentage on the balance brought forward from the previous year.

Depreciation provided on an asset is credited to the asset account.

Reason: The standard accounting entry for charging depreciation is to debit the Depreciation Account and credit the Asset Account.

Profit on sale of an asset is credited to the Profit on Sale of Asset Account.

Reason: When an asset is sold at a profit, the journal entry credits the Asset Account for its written down value and credits the excess amount to the "Profit on Sale of Asset Account".

Annual Depreciation = \(\frac{\text{Original Cost - Scrap Value}}{\text{Estimated Life of Asset (in years)}}\)

= \(\frac{23000-2000}{7}\)

= \(\frac{21000}{7}\)

= ₹3,000

Answer: The amount of annual depreciation is ₹3,000.

Annual Depreciation = \(\frac{\text{Cost of Asset × Rate of Depreciation}}{100}\)

= \(\frac{40000×8}{100}\)

= ₹3,200

Answer: The amount of depreciation is ₹3,200.

Total Cost = Purchasing Price + Installation Charges

= ₹2,80,000 + ₹20,000

= ₹3,00,000

Period of Use: From 1st October 2015 to 31st March 2016 = 6 months

Depreciation of six months = \(\frac{\text{Cost of Asset × Rate of Depreciation}}{100}\) × Period

= \(300000×\frac{6}{100}×\frac{6}{12}\)

= ₹18,000 × 0.5

= ₹9,000

Answer: The amount of depreciation for the period is ₹9,000.

Year 1 (1st January 2016 to 31st March 2016):

Depreciation for 3 months = \(200000×\frac{10}{100}×\frac{3}{12}\) = ₹5,000

WDV on 31st March 2016:

Cost of Machinery on 1/1/2016 - Depreciation for 3 months (1/1/16 to 31/3/16)

= ₹2,00,000 − ₹5,000

= ₹1,95,000

Year 2 (1st April 2016 to 31st March 2017):

Depreciation for 12 months on WDV:

= \(195000×\frac{10}{100}\)

= ₹19,500

WDV on 31st March 2017:

= ₹1,95,000 − ₹19,500

= ₹1,75,500

Answer: The Written Down Value as on 31st March 2017 is ₹1,75,500.

10% per annum on Original Cost (Straight Line Method)

Depreciation for 2015–16 (12 months):

= \(10000×\frac{10}{100}\)

= ₹1,000

WDV on 1st April 2016:

= ₹10,000 − ₹1,000

= ₹9,000

Depreciation till Date of Sale (1st April 2016 to 1st July 2016 – 3 months):

= \(10000×\frac{10}{100}×\frac{3}{12}\)

= ₹250

Book Value on 1st July 2016:

= ₹9,000 − ₹250

= ₹8,750

Profit/Loss Calculation:

Sale Price − Book Value

= ₹7,000 − ₹8,750

= −₹1,750

Answer: There is a Loss on Sale of Machinery of ₹1,750.