A business bought two automatic blind tubular machines producing fasteners on 1 January 2018 at a cost of Rs 15 000 each. Each machine had an estimated life of 5 years and a nil residual value. The straight line method of depreciation is used. Owing to an unforeseen slump in market demand for fasteners, the business decided to reduce its output and switch to other products instead. On 31 March 2020 one tubular machine was sold on credit to a buyer for Rs 8 000. Later in the year, however, it was decided to abandon production of fasteners altogether and the second tubular machine was sold on 1 December 2020 for Rs 2 500 cash. REQUIRED: a) Machinery Account at cost for the year ended 31 December 2020. b) Provision for depreciation on Machinery Account for the year ended 31 December 2020. c) Disposal Account. d) Explain the reasons for recording depreciation by using accounting concepts.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A business bought two automatic blind tubular machines producing fasteners on 1 January 2018 at a cost of Rs 15 000 each. Each machine had an estimated life of 5 years and a nil residual value. The
Owing to an unforeseen slump in market demand for fasteners, the business decided to reduce its output and switch to other products instead. On 31 March 2020 one tubular machine was sold on credit to a buyer for Rs 8 000.
Later in the year, however, it was decided to abandon production of fasteners altogether and the second tubular machine was sold on 1 December 2020 for Rs 2 500 cash.
REQUIRED:
a) Machinery Account at cost for the year ended 31 December 2020.
b) Provision for depreciation on Machinery Account for the year ended 31 December
2020.
c) Disposal Account.
d) Explain the reasons for recording depreciation by using accounting concepts.
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