2. Financial Accounting 1 Lecture – 19 Recap Disposal of fixed assets Policies for fixed assets Journal entries In case of straight line method Written down value method

3. Financial Accounting 2 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”

4. Financial Accounting 3 Lecture – 19 “Capital Work In Progress Account” is shown as a separate head in the balance sheet.

5. Financial Accounting 4 Lecture – 19 At the time of completion all the costs are transferred to fixed assets account from capital work in progress account. Journal entry DebitFixed Asset (relevant account) CreditCapital Work in Progress Account

6. Financial Accounting 5 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

7. Financial Accounting 6 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

8. Financial Accounting 7 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

9. Financial Accounting 8 Lecture – 19 Example 1 YrStraight LineWDV 1Cost500,000Cost500,000 Dep.(117,500)Dep. 500000 x 50%(250,000) WDV382,500250,000 2Dep.(117,500)Dep. 250000 x 50%(125,000) WDV265,000WDV125,000 3Dep.(117,500)Dep 125,000 x 50%62,500 WDV147,500WDV62,500 4Dep.(117,500)Dep 62,500 x 50%31,250 WDV30,000WDV31,250 Selling Price31,000 Profit1,000Loss(250)

10. Financial Accounting 9 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.

11. Financial Accounting 10 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.

12. Financial Accounting 11 Lecture – 19 Year 1: One machine purchased on Jul 1, Year 1 for Rs. 50,000 Policy 1 WDV Opening Balance 0 Purchase of Machine50,000 50,000 Depreciation (50,000 x 25%) x 6/12(6,250) WDV Closing Balance43,750

13. Financial Accounting 12 Lecture – 19 Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000 Policy 1 WDV Opening Balance43,750 Purchase of Machine75,000 118,750 Depreciation (118,750 x 25%) (29,688) WDV Closing Balance89,062

14. Financial Accounting 13 Lecture – 19 Year 3: One machine purchased on Apr 1, Year 3 for Rs. 100,000 Policy 1 WDV Opening Balance89,062 Purchase 100,000 189,062 Depreciation (89,062 x 25%) (22,265) Depreciation (100,000 x 25%) x 9 / 12 (18,750) WDV Closing Balance 148,047

15. Financial Accounting 14 Lecture – 19 Year 4: Machine 1 is disposed off on Sep 30, Year 4 Policy 1 WDV Opening Balance 148,047 Dep. Machine 1 (4,614) Dep. Others (148,047 – 24,609) x 25% (30,860) 112,573 WDV of Asset Disposed (19,995) WDV Closing Balance 92,578

16. Financial Accounting 15 Lecture – 19 WDV of machine sold in Year 4: Cost Year 150,000 Dep. Year 1 (50000 x 25 %) 6/12 6,250 WDV Year 143,750 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

17. Financial Accounting 16 Lecture – 19 Year 1: One machine purchased on July 1, Year 1 for Rs. 50,000 Policy 2 WDV Opening Balance 0 Purchase Cost50,000 50,000 Dep. (50,000 x 25%) (12,500) WDV Closing Balance37,500

18. Financial Accounting 17 Lecture – 19 Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000 Policy 2 WDV Opening Balance37,500 Purchase Cost75,000 112,500 Dep. (112,500 x 25%) (28,125) WDV Closing Balance84,375

19. Financial Accounting 18 Lecture – 19 Year 3: One machine purchased on Apr 1, Year 3 for Rs. 100,000 Policy 2 WDV Opening Balance84,375 Purchase Cost 100,000 184,375 Dep. (184,375 x 25%) (46,094) WDV Closing Balance 138,281

20. Financial Accounting 19 Lecture – 19 Year 4: Machine 1 is disposed off on Sep 30, Year 4 Policy 2 WDV Opening Balance 138,281 WDV of Disposed OffMachine (21,094) 117,187 Dep. (117,187 x 25%) (29,297) WDV Closing Balance 87,890

21. Financial Accounting 20 Lecture – 19 Machine Disposed Off in Year 4 Cost Year 150,000 Dep. Year 1 (50000 x 25 %)12,500 WDV Year 137,500 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

22. Financial Accounting 21 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.

23. Financial Accounting 22 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

24. Financial Accounting 23 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

25. Financial Accounting 24 Lecture – 19 Written Down Value Method YearWritten Down Value MethodRs. 1Cost500,000 Dep. 500,000 x 50%(250,000) Written Down Value250,000 2Dep. 250,000 x 50%(125,000) Written Down Value125,000 3Dep. 125,000 x 50%62,500 Written Down Value62,500 4Dep. 62,500 x 50%31,250 Written Down Value31,250 Selling Price31,000 Loss On Disposal(250)

26. Financial Accounting 25 Lecture – 19 Straight Line Value Method YearStraight Line MethodRs. 1Cost500,000 Depreciation(94,000) Written Down Value406,000 2Depreciation(94,000) Written Down Value312,000 3Depreciation(94,000) Written Down Value218,000 4Depreciation(94,000) Written Down Value124,000 Selling Price31,000 Loss on Disposal93,000