 # Straight line method of depreciation – PU 2011 Fall

Straight-line method of depreciation, acquisition entry, depreciation journal entry

#### PU 2011 Fall Q. No. 5a

Pradeep & Company purchase several assets for Rs. 1,50,000. The estimated market value of the assets was as follows:

Land                                  Rs. 1,00,000

Building                            Rs. 60,000

Vehicles                            Rs. 40,000

Required:

i. Pass the journal entry to record the purchase of assets.                   

ii. Record the depreciation expenses for the 1st year according to the straight-line method,          using the life of 5 years and expecting salvage value of building Rs. 10,000.   

iii. How would the building appear on the balance sheet at the end of 2nd year? 

iv. Assume that at the end of 3rd year the building was sold for Rs. 5,000. Record the entry for the sales of building.                                                                   

Solution:

i.

Calculation of acquisition cost of each asset:

Acquisition cost of land = Rs. 1,00,000 / Rs. 2,00,000 × Rs. 1,50,000 = Rs. 75,000

Acquisition cost of Building = Rs. 60,000 / Rs. 200,000 × Rs. 1,50,000 = Rs. 45,000

And, acqusition cost of vehicles = Rs. 40,000 / Rs. 2,00,000 × Rs. 1,50,000 = Rs. 30,000

Now,

#### Journal entry

Land a/c Dr.      Rs. 75,000

Building a/c Dr. Rs. 45,000

Vehicles a/c Dr. Rs. 30,000

Cash a/c                        Rs. 1,50,000

(To record the purchase of assets)

ii.

### Under the straight-line method

Annual depreciation = Cost – Salvage value / Estimated useful life = Rs. 45,000 – Rs. 10,000 / 5 years = Rs. 7,000

#### Journal entry

Depreciation expenses a/c Dr. Rs. 7,000

Accumulated depreciation – building a/c Rs. 7,000

(To record the depreciation expense on building for one year under the straight-line method of depreciation)

iii.

#### Partial balance sheet

 Property, plant, and equipment’s Amount (Rs.) BuildingLess: Accumulated depreciation for 2 years 45,00014,000Rs. 31,000

iv.

Calculation of gain/ loss on sale building

 Cost Less: Accumulated depreciation up to 3rd yearBook value at the end of 3rd yearLess: Sold priceLoss on sale Rs. 45,000Rs. 21,000Rs. 24,000Rs. 5,000Rs. 19,000

#### Journal entry

Cash a/c Dr.                                                              Rs. 5,000

Loss on sale a/c Dr.                                                Rs. 19,000

Accumulated depreciation – building a/c Dr.    Rs. 21,000

Building a/c                                                                        Rs. 45,000

(To record the sale of building on a loss)