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

2. Lecture 1
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”

3. Lecture 1
“Capital Work In Progress Account” is shown as a separate head in the balance sheet.

4. Debit Fixed Asset (relevant account)
Lecture 1
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

5. These costs may include: Freight Cost of assembling Financial costs
Lecture 1
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

6. 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. 30,000.
At the end of four year the machine was sold for Rs. 31,000.
Depreciation is charged on the basis of use.
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

7. 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

8. 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)
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)

9. Straight Line Value Method
Year
Straight Line Method
Rs. 1
Cost
500,000
Depreciation
(94,000)
Written Down Value
406,000 2
312,000 3
218,000 4
124,000
Selling Price
31,000
Loss on Disposal
93,000

10. Lecture 1
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. Lecture 1
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. Year 1: One machine purchased on Jul 1, Year 1 for Rs. 50,000
Lecture 1
Year 1: One machine purchased on Jul 1, Year 1 for Rs. 50,000
Policy 1
WDV Opening Balance
Purchase of Machine ,000
50,000
Depreciation (50,000 x 25%) x 6/12 (6,250)
WDV Closing Balance ,750

13. Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000
Lecture 1
Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000
Policy 1
WDV Opening Balance ,750
Purchase of Machine ,000
118,750
Depreciation (118,750 x 25%) (29,688)
WDV Closing Balance ,062

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

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

16. WDV of machine sold in Year 4: Cost Year 1 50,000
Lecture 1
WDV of machine sold in Year 4:
Cost Year ,000
Dep. Year 1 (50000 x 25 %) 6/ ,250
WDV Year ,750
Dep. Year 2 (43750 x25%) 10,938
WDV Year ,812
Dep. Year 3 (32,812 x 25%) ,203
WDV Year ,609
Dep. Year 4 (24,609 x 25%) x 9 / ,614
WDV Year ,995

17. Year 1: One machine purchased on July 1, Year 1 for Rs. 50,000
Lecture 1
Year 1: One machine purchased on July 1, Year 1 for Rs. 50,000
Policy 2
WDV Opening Balance
Purchase Cost ,000
50,000
Dep. (50,000 x 25%) (12,500)
WDV Closing Balance ,500

18. Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000
Lecture 1
Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000
Policy 2
WDV Opening Balance ,500
Purchase Cost ,000
112,500
Dep. (112,500 x 25%) (28,125)
WDV Closing Balance ,375

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

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

21. Machine Disposed Off in Year 4 Cost Year 1 50,000
Lecture 1
Machine Disposed Off in Year 4
Cost Year ,000
Dep. Year 1 (50000 x 25 %) 12,500
WDV Year ,500
Dep. Year 2 (37500 x25%) ,375
WDV Year ,125
Dep. Year 3 (28,125 x 25%) ,031
WDV Year ,094