double declining method example

Double declining method – PU 2010 Spring

Double declining method, straight-line method, and units of production method

PU 2010 Spring Q. No. 3

On May 1st 2006, Star Trading Company purchased a printing machine at a cash price of Rs. 420,000. While purchasing the machine it incurred transit insurance Rs. 42,000, custom duty Rs. 30,000 and installation charge Rs. 8,000.                                  [5×3]

a. Prepare journal entry on May 1st, 2006 for the purchase of printing machine.

b. Prepared journal entries for the depreciation as on year ended Dec 31st, 2006:

i. Assuming that the useful life of the machine is estimated to be 9 years with 50,000 salvage value at the end and the publication uses straight line method for depreciation.

ii. Assuming that the total output capacity of the machine is 50,000 copies with Rs. 60,000 salvage value. The machine printed 12,000 copies during the first year of operation.

iii. Assume that the publication follows double declining method of depreciation @20% per annum.

c. Prepare journal entry for the sales of machine, assume that the printing machine become absolute for the publication and sold for Rs. 250,000 on Dec 31st, 2009. according to question 3. b(i). 

Solution:

a.

Calculation of acquisition cost of printing machine:

Acquisition cost = Purchase price + Transit insurance + Custom duty + Installation charge = Rs. 420,000 + Rs. Rs. 42,000 + Rs. 30,000 + Rs. 8,000 = Rs. 500,000

Journal entry

In the book of Star Trading Company

Printing machine a/c Dr. Rs. 500,000

Cash a/c                                       Rs. 500,000

(To record the purchase of printing machine)

b. (i)

Under the straight-line method

Annual depreciation = Acquisition cost – Salvage value / Estimated life of machine = Rs. 5,00,000 – Rs. 50,000 / 9 years = Rs. 50,000

Journal entry

Dec 31st, 2006

Depreciation expenses a/c Dr. Rs. 33,333

Accumulated depreciation – Printing machine a/c  Rs. 33,333

(To record the depreciation charge on printing machine for eight months)

(ii)

Under units of production method

Depreciation expenses per copy = Acquisition cost – Salvage value / Output capacity of machine = Rs. 500,000 – Rs. 60,000 / 50,000 copies = Rs. 8.80 per copy

Now, depreciation for the first year = Rs. 8.80 × 12,000 copies = Rs. 105,600

Journal entry

Dec 31, 2006

Depreciation expenses a/c Dr. Rs. 105,600

Accumulated depreciation – Printing machine a/c Rs. 105,600

(To record the annual depreciation on printing machine under the units of production method)

iii.

Under the double declining method of depreciation

Depreciation expenses for 2006 = 20% of Rs. 500,000 × 8/12 = Rs. 66,667

Journal entry

Dec 31st, 2006

Depreciation expenses a/c Dr. Rs. 66,667

Accumulated depreciation – Printing machine a/c Rs. 66,667

(To record the depreciation charge on printing machine under the double declining method of depreciation)


c.

Calculation of gain/ loss on sale

Acquisition cost
Less: Acc. depreciation upto Dec 31st, 2009
(33,333 + 50,000 + 50,000 + 50,000)
Book value
Less: Sold price
Loss on sale
Rs. 5,00,000

Rs. 183,333
Rs. 316,667
Rs. 250,000
Rs. 66,667

Journal entry

Dec 31, 2009

Cash a/c Dr.                                                                    Rs. 250,000

Loss on sale a/c Dr.                                                         Rs. 66,667

Accumulated depreciation – printing machine a/c Dr. Rs. 183,333

Printing machine a/c                                                                      Rs. 500,000

(To record the sale of printing machine at a loss)


 

See, also

PU 2010 Fall Q. No. 4a

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