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R. Kanitkar had purchased a machinery fo...

R. Kanitkar had purchased a machinery for rupee 1,00,000 on 1st October, 2016. Another machine was purchased for rupee 60,000 plus IGST `" @ "12 % ` by cheque on 1st April, 2018. Depreciation is charged `" @ "10%` p.a. by the Straight Line Method. Accounts are closed every year on 31 st March. You are required to pass necessary Journal entries for the years ended 31st March, 2017, 2018, and 2019 and show Machinery Account and Machinery in the Balance Sheet:
(i) When Provision for Depreciation Account is not maintained.
(ii) When Provision for Depreciation Account is maintained.

Text Solution

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(i) When Provision for Depreciation Account is not maintained.





Sale or Disposal of an Asset: An asset may be sold before it is fully depreciated, i.e., before the end of its estimated useful life due to obsolescence, inadequacy or for any other reason. Depreciation in the year of sale is charged from the beginning of the year up to the date of sale. The sale proceeds, may not be equal to the written down value of the asset. If the sale proceeds is more than the written down value of the asset on the date of sale, it is a gain (profit) on sale of asset, i.e., Gain (profit)= Sale Value - Book Value on the date of sale. On the other hand, if the sale proceeds is less than the written down value of the asset on the date of sale, it is loss on sale of the asset, i.e., Loss= Book Value on the date of Sale - Sale Value. Gain (Profit) or loss on sale of asset is transferred to Profit and Loss Account.

Note: Gain (Profit) on Sale of Asset is credited to Profit and Loss Account and Loss on Sale of Asset is debited to Profit and Loss Account. Continuing Illustration 3, suppose the machine is sold on 30th June, 2019 for Rs 1,05,000. The Depreciation for 3 months is Rs 3,750, i.e., 3/2 of Rs 15,000. This amount will be credited to the Machinery Account. Rs 1,05,000 will also be credited. A balance of Rs 13,750 remains. This is loss and should be transferred to the Profit and Loss Account. The Machinery Account for the year ending 31st March, 2020 will appear as under:

Note : Loss on Sale of Machinery = Book Value on the State-Sale Proceeds
`=(Rs 1,22,500-Rs 3,750)-Rs 1,05,000=Rs 13,750`.
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