double decline method depreciation

Double decline method – PU 2011 Spring (Or)

Double decline method, straight-line method, units of production method

Financial Accounting-II – Property, plant, and equipment

PU 2011 Spring Q. No. 3 Or

On 1st June 2011, Asada Trading Company purchased an oven at a cash price of Rs. 840,000. While purchasing the machine it incurred shipment insurance Rs. 84,000, custom duty Rs. 60,000 and installation charge Rs. 16,000. [15]

Required:

a. Prepare journal entry required on 1st June 2011 or the purchase of oven.

b. Prepare journal entries or the depreciation of oven as on year ended 31 st December,

i. Assuming that the useful life of the oven is estimated to be 9 years with Rs. 100,000 salvage value at the end and the company uses Equal installment method i.e. Straight Line Method.

ii. Assuming that expected total output capacity of the oven is 100,000 breads with Rs. 120,000 salvage. The oven produced 24,000 breads during the first year of operation.

iii. Assume that the company follows double decline method of depreciation @20% per annum.

c. Prepare Journal entry for the sales of oven. Assume that the oven will become obsolete for the company and sold for Rs. 150,000 on 31st December 2014, according to question 3.b(i).

Solution:

a.

Calculation of acquisition cost = Cash price + Shipment insurance + Custom duty + Installation charge = Rs. 840,000 + Rs. 84,000 + Rs. 60,000 + 16,000 = Rs. 10,00,000

Journal entry

June 1, 2011

Oven a/c Dr. Rs. 10,00,000

Cash a/c                     Rs. 10,00,000

(To record the purchase of oven on cash)


 

b. (i)

 Calculation of depreciation expenses under straight-line method

Annual depreciation = Acquisition cost – Salvage value / Estimated useful life = Rs. 10,00,000 – Rs. 100,000 / 9 years = Rs. 1,00,000

For, June to Dec. 2011 = Rs. 1,00,000 / 12 × 7 = Rs. 58,333

Journal entry

Dec 31st, 2011

Depreciation expenses a/c Dr. Rs. 58,333

Accumulated depreciation – oven a/c  Rs. 58,333

(To record the depreciation expenses on the oven for 7 months)

ii. Depreciation expenses per bread under the units of production method

Per bread cost = Acquisition cost – Salvage value / Total output capacity = Rs. 10,00,000 – Rs. 1,20,000 / 1,00,000 breads = Rs. 8.80 per bread

Now, depreciation expenses for first year = 24,000 breads × Rs. 8.80 = Rs. 211,200

 

Journal entry

Dec 31st, 2011

Depreciation expenses a/c Dr. Rs. 211,200

Accumulated depreciation expenses a/c Rs. 211,200

(To record the depreciation expenses for the first year)

iii.

Under the double decline method

Depreciation expenses = 20% of Rs. 10,00,000 × 7/12 = Rs. 1,16,667

Journal entry

Dec 31st, 2011

Depreciation expenses a/c Dr. Rs. 1,16,667

Accumulated depreciation expenses a/c Rs. 1,16,667

(To record the depreciation expenses on oven for 7 months unde the double decline method)


 

c.

Calculation of gain/ loss on sale

Cost price
Less: Accumulated depreciation
(58,333 + 100,000 + 1,00,000 + 1,00,000)
Book value on Dec 31st, 2014
Less: Sold price
Loss on sale
Rs. 10,00,000

Rs. 3,58,333
Rs. 6,41,667
Rs. 150,000
Rs. 491,667

Journal entry

Dec 31st, 2014

Cash a/c Dr.                                        Rs. 150,000

Accumulated depreciation a/c Dr. Rs. 358,333

Loss on sale a/c Dr.                            Rs. 491,667

Oven a/c                                                           Rs. 10,00,000

(To record the sale of oven on loss)


 

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