DEPRECIATION OF FIXED ASSETS-2
THE PROVISION FOR DEPRECIATION
SPECIMEN QUESTION
On 1st January 1998, a company purchased a motor van at a 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 the 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 b/d | 160,000 | 31/12/1999 | Balance c/d | | 160,000 |
| 1/1/2000 | Balance b/d | 160,000 | 31/12/2000 | Balance c/d | | 160,000 |
| 1/1/2001 | Balance b/d | 160,000 | |
| DR PROFIT AND LOSS ACCOUNT ASSET FOR THE YEAR ENDED 31 DEC. 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 31 DEC.
| LIABILITIES | | | ASSETS | | |
|---|
| | | 1998 | Motor van | 160,000 | |
| | | less: depreciation | | 40,000 | 120,000 |
| | | 1999 | Motor van | 160,000 | |
| | | less: depreciation | | 80,000 | 80,000 |
| | | 2000 | Motor van | 160,000 | |
| | | less: depreciation | | 120,000 | 40,000 |
MODERN METHOD
Again we will use the previous example. Machines costing 6,000 on 1st January 1991 and being depreciated at 10% each year using the diminishing balance method for the first three years.
Required:
- Machinery A/C
- Provision for depreciation
- Profit and loss A/C
- Extracted balance sheet
WORKING
| Machinery at cost 1991 | 6,000 |
| Less depreciation 6,000 × 10/100 | 600 |
| Net book value for 31/12/1991 | 5,400 |
| Less depreciation 1992 – 5,400 × 10/100 | 540 |
| Net book value for 31/12/1992 | 4,860 |
| Less depreciation 1993 – 4,860 × 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 | | | 6,000 | 31/12/1991 | Balance c/d | | |
| 1/1/1992 | Balance b/d | | | 6,000 | 31/12/1992 | Balance c/d | | |
| 1/1/1993 | Balance b/d | | | 6,000 | 31/12/1993 | Balance c/d | | |
| 1/1/1994 | Balance b/d | | | 6,000 | |
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 | | 1,140 | 1/1/1992 | Balance b/d | | 600 |
| 31/12/1993 | Balance c/d | | 1,628 | 1/1/1993 | Balance b/d | | 1,140 |
DR PROFIT AND LOSS ACCOUNT ASSET FOR THE YEAR ENDED 31 DEC. CR
| 31/12/1991 | Provision Depreciation | 600 | |
| 31/12/1992 | Provision Depreciation | 540 | |
| 31/12/1993 | Provision Depreciation | 486 | |
BALANCE SHEET AS AT 31ST DEC
| LIABILITIES | | | 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 purchased a motor vehicle for bread delivery at a cost of Tshs 900,000. They want to depreciate the asset by both methods. The asset will be kept for four years and then disposed of for an estimated amount of Tshs 100,000. For the reducing balance method, the percentage figure is 50%.
Formula:
Depreciation = (Cost of Asset – Scrap value/disposal value) / Number of years
Therefore, accumulated depreciation is Tshs 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 | | |
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 |
DR ACCUMULATED DEPRECIATION A/C CR
| Date | Particulars | f | | Amount | Date | Particulars | f | Amount |
|---|
| 31-Dec | Balance c/d | | | 200,000 | 31-Dec | Profit & Loss | | 200,000 |
DIMINISHING METHOD
| DR | | PROVISION FOR DEPRECIATION A/C | | CR |
|---|
| Date | Particular | f | Amount | Date | Particulars | f | Amount |
|---|
DISPOSAL OF ASSET
This is when the firm decides to resell the asset after depreciation or due to certain conditions.
The firm may decide to resell the asset after they have depreciated it 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 account and show the effect.
WORKINGS
| Depreciation = | Cost of Asset – scrap value/disposal value | Number of years |
|---|
= 410,000 / 4 = 102,500
The depreciation for each year is 102,500.
DR MACHINE ACCOUNT CR
| Date | Particulars | f | | Amount | Date | Particulars | f | Amount |
|---|
| 1/1 | Cash | | | 500,000 | 31/12 | Balance c/d | | 500,000 |
DR PROVISION FOR DEPRECIATION A/C CR
| Date | Particulars | f | | Amount | Date | Particulars | f | Amount |
|---|
| 31-Dec | Balance c/d | | | 102,500 | 31/12/1991 | Profit & Loss A/C | | 102,500 |
BALANCE SHEET AS AT 31 DEC.
| LIABILITIES | | | ASSETS | | |
|---|
| | | 1991 | Machine | 500,000 | |
| | | Less: Depreciation | | 102,500 | 397,500 |
