Solved Problems and Exercises- Depreciation

Solved Problems

Depreciation

Exercise

1. A company purchased a piece of land for Rs. 17,500,000. It paid a commission of Rs.
1,250,000 and spent Rs. 1,750,000 for demolishing an old building on the land. At what
cost would the company record the land in its books?
a. Rs. 19,250,000
b. Rs. 17,500,000
c. Rs. 18,750,000
d. Rs. 20,500,000

(d)
2. A company purchases a new delivery van for Rs. 1,000,000. It pays taxes of 12.5% on
the purchase price, Rs. 11,000 on safety tests and Rs. 60,000 on painting the name of the
company on the van. The annual license fee is Rs. 6,000. At what cost will the company
record the van?
a. Rs. 1,202,000
b. Rs. 1,196,000
c. Rs. 1,125,000
d. Rs. 1,136,000

(b)

3. A company purchased equipment costing Rs. 4,500,000, and paid transportation charges
of Rs. 210,000. Further, Rs. 600,000 was spent on installing the equipment. The
equipment is expected to have a useful life of 5 years and a residual value of Rs. 900,000.
What would be the annual depreciation charge under the straight-line method?
a. Rs. 1,062,000
b. Rs. 882,000
c. Rs. 738,000
d. Rs. 720,000

(b)
 4. A company charges a depreciation of Rs. 70,000 per month on a machine using the
straight-line method. The machine was acquired for Rs. 9,000,000 and is expected to
have a salvage value of Rs. 600,000 at the end of its useful life. What is the annual rate of
depreciation?
a. 12%
b. 2%
c. 8%
d. 10%

(d)

5. A company purchased factory equipment on September 1, 2014 for Rs. 4,800,000. The
useful life of the equipment is 10 years, and it is estimated that the equipment will have a
salvage value of Rs. 300,000 at the end of its useful life. How much depreciation would
the company charge on the equipment on March 31, 2015 using the straight-line method?
a. Rs. 450,000
b. Rs. 262,500
c. Rs. 225,000
d. Rs. 187,500

(b)

6. A company’s records show a depreciation expense of Rs. 250,000 on an equipment for

the current year and a balance of Rs. 1,250,000 in the accumulated depreciation account
at the end of the year. The cost of the equipment was Rs. 3,750,000. The salvage value
was estimated at Rs. 750,000 at the end of its useful life. The company charges
depreciation on a straight-line basis. What is the remaining useful life of the equipment?
a. 15 years
b. 12 years
c. 5 years
d. 7 years

(d)

7. A machine purchased for Rs. 2,250,000 has an estimated salvage value of Rs. 450,000. If
the machine’s value is depreciated at the rate is 20% using the declining balance method,
the second year depreciation will be
a. Rs. 450,000
b. Rs. 288,000
c. Rs. 360,000
d. Rs. 300,000

(c)
8. After using an equipment for 2 years, a company revises its total useful life as 6 years
from the original estimate of 8 years. The cost of the equipment was Rs. 3500,000 and its
estimated salvage value Rs. 700,000. The equipment was depreciated using the straight-
line method. With the revision in the useful life, how much depreciation should the
company charge in the third year?
a. Rs. 525,000
b. Rs. 466,650
c. Rs. 700,000
d. Rs. 350,000

(a)

9. A company sells a machine for Rs. 4,000,000 on March 31, 2015. The machine was acquired
6 years earlier for Rs. 12,000,000. The company has been depreciating the machine on a
straight-line basis assuming its useful life to be 10 years and a salvage value of Rs.
2,000,000. The company should recognize a

a. Rs. 2,000,000 loss on disposal

b. Rs. 2,000,000 gain on disposal
c. Rs. 4,000,000 loss on disposal
d. Rs. 4,000,000 gain on disposal

(a)

Solved Problems

1. A company acquired a machine on October 1, 2013 at a cost of Rs. 210,000 and spent Rs.
15,000 on its installation. The company writes off depreciation at 10% per annum. The books are
closed on 31 March every year. Calculate the accumulated depreciation and the book value of the
machine as on 31 March, 2015 when: (a) the company uses straight-line method of charging
depreciation, (b) the company uses written-down value method of charging depreciation.

(Rs.)

Purchase price 210,000

Installation cost 15,000
----------
Depreciable amount 225,000
-----------
Straight-line method
Depreciation (Oct 1, 2013–March 31, 2014) (Rs. 225,000 × 10% × 0.5) 11,250
Depreciation (2014–15) (Rs. 225,000 × 10%) 22,500
----------
Accumulated depreciation 33,750
 Book value (Rs. 225,000 – 33,750) 191,250

WDV method

Depreciation (Oct. 1, 2013–March 31, 2014) (Rs. 225,000 × 10% × 0.5) 11,250
Depreciation (2014–15) (Rs. (225,000 – 11,250) × 10%) 21,375
----------
Accumulated depreciation 32,625
Book value (Rs. 225,000 – 32,625) 192,375

2. A firm purchased on April 1, 2012 certain machinery for Rs. 58,200 and spent Rs. 1,800 on
its erection. On October 1, 2012 another machine was acquired for Rs. 20,000. On October 1,
2013 the machinery purchased on April 1, 2012, having become obsolete was auctioned for Rs.
38,600 and on the same date fresh machinery was purchased for Rs. 40,000.

Depreciation is charged at 10% per annum on the WDV. Calculate: (a) the profit or loss on the
sale of machine, (b) the accumulated depreciation, gross value and net value of machinery as on
March 31, 2014.

Machine 1 Machine 2 Machine 3

2012-13

Acquisition cost 58,200 20,000

Cost of erection 1,800

Depreciable amount 60,000

Depreciation

Machine 1(60,000 x 10%) 6,000

Machine 2 (20,000 x 10% x6/12) 1,000

Book value (31.3.2013) 54,000 19,000

2013-14

Acquisition cost (machine 3) 40,000

Depreciation (machine1)

(54,000 x 10% x6/12) 2,700

Book value (machine 1) 51,300

Sale Value (machine 1) 38,600

Loss on sale (machine 1) 12,700

Depreciation (machine 2)

(19,000 x 10%) 1,900

Machine (3) (40,000 x10% x 6/12) 2,000

Book value (31.3.2014) 17,100 38,000

Accumulated depreciation = (Rs.1,000 +1,900 + 2,000) = Rs.4,900

Gross value of machinery (Rs.20,000 +40,000) = Rs.60,000

Net value of machinery (Rs.17,100+38,100) = Rs.55,100

3. The Accounting Policy related to depreciation appearing in the financial statements

of a company engaged in steel production reads:

“For financial reporting purposes, the company uses the units-of-production method of
depreciating its steel rolling mills and the straight-line method for other plants and equipment.
Annual straight-line depreciation rates for financial reporting purposes are as follows: Buildings
2.5%–10%, Machinery and Equipment 5%–33%. For tax purposes, depreciation is computed
using the written-down value method.”

(i) How does the company decide on the method of charging depreciation?

(ii) The company is using different depreciation methods for its steel rolling mills and other
items of plant. Is it in violation of the principle of consistency?

(iii) What factors does the company consider in determining the useful lives of different assets?

(iv) Why does the company use written-down value method for tax purposes?

(i) For financial reporting purposes, the company is using different methods for different items of
its production equipment. The company appears to be guided by the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity. For tax purposes, the
company is using the method prescribed by the tax laws.

(ii) Adoption of different depreciation methods for its steel rolling mills and other
items of plant by the company is not a violation of the principle of consistency. Consistency
principle is violated when the company changes the method of depreciation for an item from one
period to another.
(iii) The factors considered are expected usage of the asset, expected physical wear and tear,
technical or commercial obsolescence and legal or similar limits on the use of the asset, such as
the expiry dates of related leases.

(iv) For tax purposes, the company is using the written-down value method as this method is
prescribed by the tax laws. WDV rates are higher than straight line rates. Higher rates of
depreciation are generally allowed under the tax laws to provide an incentive for more
investment in businesses.

4. A company buys land for a new project. The purchase price is Rs. 8,500,000. The broker who
consummates the deal is paid a commission of 4% of the purchase price. The company has to
pay a legal fee of Rs. 100,000 to get the land registered in its name. The land is uneven and the
company spends Rs. 200,000 on leveling it. Determine the cost at which the land will be
recorded in the books of the company.

Rs.

Purchase price 8,500,000

Brokerage 340,000
Legal fee 100,000
Leveling Cost 200,000
----------------
Total Cost 9,140,000
----------------

5. X purchases land and a building for Rs. 50,000,000. Had X purchased the various items
separately, the land would have cost Rs. 24,000,000, and the building Rs. 36,000,000. How
much of the purchase price should X apportion to the land and the building?

Valuer’s Estimate Percentage Apportioned Cost

Rs. Rs.

Land 24,000,000 40% 20,000,000

Building 36,000,000 60% 30,000,000

-------------- --------- ----------------
Total 60,000,000 100% 50,000,000

6. X acquires a second-hand truck for Rs. 1,700,000 and spends Rs. 3,50,000 on its overhaul to
make it ready for his use. He estimates that the useful life of the truck will be 4 years and that he
would be able to sell the truck for Rs. 150,000 at the end of 4 years. He decides to depreciate the
truck using the straight-line method. At the end of 2 years, X sells the truck for Rs. 1,200,000.
Determine the gain or loss made by X on the sale of the truck.

Cost of Truck (Rs.1,700,000+ Rs.350,000) Rs.2,050,000

Less: Residual value 150,000
------------------
Depreciable amount 1,900,000
Useful life 4 Years
Yearly depreciation Rs. 475,000
Depreciation for 2 years (Rs.475,000 x 2) Rs. 950,000
Book value after 2 years (Rs.2,050,000- Rs.950,000) Rs.1,100,000
Sale Price Rs.1,200,000
Gain on Sale (Rs.1,200,000- Rs.1,100,000) Rs.100,000

7. A company purchased a textile weaving machine for Rs. 10 million. The machine has an
expected useful life of 6 years and a residual value of Rs. 1 million. The company uses the
straight-line method for charging depreciation. At the end of year 5, the company spends Rs. 2.5
million on a major overhaul of the machine. The company expects the machine to last another 2
years after which it will have a residual value of Rs. 1.5 million. How much depreciation will the
company charge in year 6 and year 7?

Rs.Million

Original cost 10

Depreciation for 5 years (10-1)/6*5 7.5

Book value at the end of 5 years 2.5

Expenditure on major overhaul 2.5

New Depreciable amount (2.5+2.5-1.5) 3.5

Depreciation per year for year 6 and 7 1.75