straight line method of depreciation

Straight line method of depreciation – PU 2011 Fall

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

Financial Accounting-II – Property, plant, and equipment

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.                   [2]

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.   [2]

iii. How would the building appear on the balance sheet at the end of 2nd year? [1]

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.                                                                   [3]

 

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’sAmount (Rs.)
Building
Less: Accumulated depreciation for 2 years

45,000
14,000
Rs. 31,000

iv.

Calculation of gain/ loss on sale building

Cost
Less: Accumulated depreciation up to 3rd year
Book value at the end of 3rd year
Less: Sold price
Loss on sale
Rs. 45,000
Rs. 21,000
Rs. 24,000
Rs. 5,000
Rs. 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)


 

Leave a Comment

Your email address will not be published. Required fields are marked *

%d bloggers like this: