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Illustration 5. (Diminishing Balance Method): Sale of assets). Kaushal  Traders purchased a second hand machinery on 1st  January, 2002 for $ 23,000 and spent $ 2,000 on its repairs. It was decided to depreciate the machinery at 20% every year; according to diminishing balance method. Prepare the machinery account from 2002 to 2004 and show profit or loss as it was sold on 31st December; 2004 for $ 10,800. The accounts are closed on December 31every year.


Solution.                             Diminishing Balance Method

                                                  Machinery Account

Note. The amount of depreciation has been calculated @ 20% on diminishing (reducing) balances of machinery. In 2002, depreciation has been calculated on 25,000. Amount spent on  repairs to second hand machinery is capital expenditure. It was necessary to bring the old machinery in working order. It is the part of the cost of machinery, so it has been added to its cost. The balance of machinery reduced to $ 20,000 in 2003 and further reduced to $. 16,000 in 2004, so depreciation for 2003 has been calculated on 20,000 and for 2004 on $16,000.

Loss on sale of machinery has been calculated as under:

Book value of machinery as on January 1, 2002              $25000


Less : Depreciation :

2002 (for full year)                    5,000

2003 (for full year)                    4,000

2004 (for full year)                    3,200




Book value of machinery as on December 31, 2004                        12800

Less : Amount received from sale of machinery                               10800                                             Loss on sale of machinery                                                                  2000

Illustration 6. (Diminishing Balance: Assets sold partly). A company whose accounting year is the calendar year purchased on 1st April, 2001 machinery costing $ 30,000.

It further purchased machinery on 1st October, 2001 costing $ 20,000 and on 1 st July, 2002 costing $ 10,000


On 1st January. 2003 one-third of the machinery which was installed on l st April. 200l,became obsolete and was sold for $ 3,000.


Show how the machinery account would appear in the books of company. The depreciation is charged at 10% p.a. on Written Down Value Method.


Solution.                                        Written Down Value Method

                                                                Machinery Account

Working Notes :

(i) Calculation of depreciation for year 2003 :Total Written Down Value as on January 1, 2003Less :Written Down Value of 1/3rd of

plant sold (1 0,000 – 750 – 925)

Written down value of remaining machine


Depreciation at 10% on Written Down Value (43, 700 x 10/100)


(ii) Calculation of loss on sale of machinery :

Book value of I /3rd machinery purchased on April l, 200 1 as on January 2003

( 1 0,000- 750 – 925)

Less: Amount received from sale

Loss on sale of machinery
















Illustration 7. (Diminishing Balance : Sale of assets). A manufacturing concern. whose books are closed on 31st December, purchased machinery for $50,000 on 1- 1-2000. Additional machinery was acquired for $. 10,000 on 1-7-2001 and for $ 16,061 on 1-1-2004. Certain machinery purchased for $ 10,000 on 1-1-2000 was sold for $ 5,000 on 30-6-2003.


Give the machinery account for 5 years. Depreciation is written off at 10% per annum on written down value method.



Written Down Value Method

Machinery Account

Dr.                                                                                                                               Cr.


Working Notes

(i) Calculation of loss on sale of machinery :Book value of machinery as on January 1, 2000Less : Depreciation according to diminishing balance method :

2000 (for full year)

2001 (for full year)

2002 (for full year)

2003 (for six months)



Book Value of Machine sold as on June 30, 2003

Less : Amount received from sale


Loss on sale of machine

(ii) Calculation of depreciation for the year 2003 :

Book value of all machineries as on January 1, 2003

Less : Book value of machinery to be sold as on January, 1, 2003


Depreciation on 37,710@ 10% for full year

Add : Depreciation on 7,290 @ 10% for six months

Total depreciation for 2003



























(-) 5,000





(-) 7,290










A. Objective Type Questions :


1. Indicate the alternative which you consider to be suitable :


1. Depreciation according to straight line method is calculated on ….. .

(a) opening balance                                        (b) closing balance

(c) original cost                                               (d) market value.


2. Depreciation is calculated on ….. .

(a) fixed assets                                                (b) current assets

(d) wasting assets.                               (c) fictitious assets


3. Depreciation is calculated on …… of assets.

(a) cost price                                                  (b) market value

(d) invoice price.                                            (c) book value


4. Depreciation means ….. .

(a) physical wear and tear                                            (c) fluctuation

(b) amortization                                                             (d) obsolescence.


5. According to diminishing balance method depreciation is charged on …… of assets.

(a) original cost           (b) written down value

(c) market value          (d) average cost.


6. In the straight line method, the amount of depreciation …… every year.

(a) increases                (b) decreases

(c) remains constant    (d) either increases or decreases.


Ans. l. (c) 2. (a) 3. (c) 4. (a) 5. (b). 6. (c).


B   Very short Question                                                                                                        1.Mention any three important features of depreciation.                                                     2. Mention names of three factors affecting the amount of depreciation

3. Mention the formula for calculating depreciation under straight line method.

4. What is depreciation?

5. A pharmaceutical manufacturer has just developed and registered a patent for a rare medicine. Which term will appear in its profit and loss account regarding the cost of patent written off?


Hint. Amortisation.]


C. Short Answer Type Questions :


l. Explain the following terms :

(a) Obsolescence         (b) Depletion

(c) Fluctuation             (d) Amortisation.


2. What are the different causes of depreciation ? Explain them briefly.


3. You are looking at the profit and loss account of three business enterprises. You find the term              depreciation in first, depletion in case of second and amortisation in case of third enterprise. State the type of business each of the enterprise is into.


[Hint. Fixed assets, exhaustion of natural resources, specific contracted business.]


4. There are two dentists Dr. Aggarwal and Dr. Mehta in your locality who are competitors. Both        of them have recently bought machine for patients. Dr. Aggarwal has decided to write off an equal amount of depreciation every year while Dr. Mehta wants to write off a larger amount in earlier years. They do not know anything about the methods of depreciation. Can you inform them more about the methods of depreciation they are applying even without knowing anything about accounting in formal. Who is more wise in your opinion ? Give reasons in support of your answer.


[Hint. Written down value method is more appropriate because this method is suitable for those assets which are affected by technological changes, more over, this method is recognised by Income tax law.]


D. Long Answer Type Questions :


  1. Explain the meaning of depreciation. Enumerate different methods of depreciation. Explain straight line method.
  2. Why is it necessary to provide for depreciation ? Explain the effect of depreciation on Profit and loss account and Balance Sheet.
  3. Differentiate between straight line method and written down value method of providing depreciation.
  4. Discuss the advantages and disadvantages of fixed instalment method and diminishing balance method.
  5. Explain the following :

(a) Obsolescence         (b) Amortisation

(c) Depletion               (d) Fluctuation.














1. A firm purchased on 1st January 2005, a machinery for $. 10.000. Depreciation was to be  charged @ 20% per annum on the original cost.


You are required to show the machinery account for the first three years assuming that accounts are closed on 31st December. [Ans. Closing balance = $ 4.000]


2. San jay purchased a machinery for $. 21.000 on 1st January, 2001. The estimated life of the machine is 10 years after which its residual value will be $.1,000 only. Find out the amount of depreciation and prepare machinery account for the first three years according to the fixed installment method.


Note .Depreciation =cost price –scrap valve / Life of the asses

=21,000-1,000/10=$ 2,000

(Ans . closing balance =$ .15,000)


3. A boiler was purchased from abroad for $ 10,000 .shipping and forwarding charges amounts to $ 2,000 import duty $ three years separately for each year @ 10% on diminishing balance method

[Ans. $ 2,000, $ 1,800 and $ 1,620; Closing balance = $ 14,580]


4. The book value of plant and machinery on 1-l-2002 was $ 2,00,000. New machinery for $. 10,000 was purchased on 1-10-2002 and for $. 20,000 on 1-7-2003. On 1-4-2004, a machinery whose book value had been $. 30,000 on 1-1-2002 was sold for $. 16,000 and the entire amount was credited to plant and machinery account. Depreciation had been charged at 10% per annum on straight line method. Show the plant an  machinery account from 1-1-2002 to 31-12-2004.


[Ans. Loss on sale of machinery = S. 7,250;

Balance of machinery account on 31st December, 2004 = $1,43,750)


5. A company had bought machinery for $. 2,00,000 including a boiler was $ 20,000. The machinery account had been credited for depreciation on the reducing instalment system for the past four years at the rate of 10%. During the fifth year. i.e., the present year, the boiler became useless on account of damage to some of its vital parts and the damaged boiler is sold for$. 4,000. Write up the machinery account.


[Ans. Loss on sale=$ 9,122; Closing balance = $ 1,06,288]


6. The original cost of furniture amounted to$ 4,000 and it is decided to write off S per cent on the original cost as depreciation at the end of each year. Show the ledger account as it will appear during the first four years  Show also how the same account will appear if it was decided to written off 5% on the diminishing balance.


[Ans. Closing balance : (i) Straight line method = $ 3,200 ; (ii) Diminishing balance = $ 3,258]


7. On 1st January, 2002 machinery was purchased for $. 20.000. On 1st July, 2003 another machine was purchased for $. 10,000 and on 1st January, 2004 one more machine was purchased for $. 5,000 .. The firm depreciates its machines@ 20% on the diminishing balance method. Show machine account for four years.

[Ans. Closing balance =$ 17, I 52]


8. A company purchased a machine on 1st January, 2003 for $ 30,000 and immediately spent $ 4,000 on its repair and $ 1,000 on its installation. On July I, 2005 the machine was sold for $. 25,000. Prepare machine account after charging depreciation @ 10% p.a. by diminishing balance method.

[Ans. Loss on sale of machine = $ 1932.50]


9. On 1st January, 2001 a merchant purchased a furniture costing $ 55,000. It is estimated that its working life is 1 0 years at the end of which it will fetch $ 5,000. Additions are made on 1 st Jan., 2002 and 1st July, 2004 to the value  of $. 9.500 and $. 8,400 (residual values $ 500 and $. 400 respectively). Show the furniture account for the first four years, if depreciation is written off according to the straight line method.

[Ans. Balance furniture account on 1st Jan., 2005 =$. 49,800]


10. A joint stock company had bought machinery for$ 1,00,000 including therein a boiler worth $ 10,000. The machinery account was for the first four years credited for depreciation on the reducing instalment system at the rate of I 0% per annum. During the fifth year, i.e., the current year, the boiler becomes useless on account of damage to its parts. The damaged boiler is sold for $ 2,000 which amount is credited to machinery account. Prepare the machinery account for the current year, adjusting therein the cash received and the loss suffered

on the damage boiler and the depreciation of the machinery for the current year.


[Ans. Loss on sale of boiler=$. 4,561 ; Closing balance of machinery account= $ 53, 144]


11. Kumar & Company purchased a machinery on 1st January, 2003 for $ 54,000 and spent $ 6.000 on its installation. On 1st September. 2004 it purchased another machine for $ 30,000.

On 3 1st March. 2005 the first machine purchased on 1st January, 2005 is sold for $ 36.000 and on the same date it purchased a new machinery for $ 80,000

On September I. 2006 the second machine (purchased on September 1, 2004) was also sold off for $ 26.000. Depreciation was provided on machinery @ 10% p.a. on original cost method annually on 31st December. Give the machinery account from 2005 to 2006.

[Ans. Loss on sale of First Machine $ 10.500, profit on sale of Second Machine = $ 2,000 :                                               Balance of Machinery a/c on 31st December. 2006 $ 66.000]


12. A company purchased a machine on 1st January, 2004 for $ 30.000 and immediately spent $ 4.000 on its repairs and $1,000 on its installation. On July I, 2006 the machine was sold for $ 25.000. Prepare machine account after charging depreciation @ /0% p.a. by rliminishing balance method. Also prepare machinery Disposal A/c.                                                                                                                                                  [Ans. Loss on sale of machine = $ 1932.50]


13. A company, whose accounting year is calendar year, purchased on 1st April, 2003 machinery costing $ 30,000.


It purchased further machinery on 1st Oct, 2003 costing $  20,000 and on 1st July, 2004 costing $ 10,000. On 1st January, 2005, one third of the machinery installed on 1st April, 2003 became obsolete and was sold for $ 3,000.


Show how machinery account would appear in the books of company, it being given that machinery was depreciated by fixed instalment method at 10% p.a. What would be the balance of machinery account on 1st January. 2006?                                                                                                                                    [Ans. Balance of Machinery A/C on 1st January, 2006 = $ 38,500]


14. The original cost of furniture and fixtures amounted to $ 4.000 and it is decided to write off 5% o.1 the diminishing value of assets as depreciated at the end of each year. Show the ledger account as it will appear during the first four years.                                                                                                                  [Ans. Balance of Machinery Account after four years $ 3258.03]


15. What is depreciation and how it is calculated? Distinguish between ‘straight line method’ and ‘written down method’ of depreciation. If an asset was purchased for $ 50,000 on 1st Jan., 2006, what would be its value three years after if it was depreciated by both these methods@ 10% p.a.

[Ans. Straight line method $ 35,000 W.D.V. method $36,450]


16. (a) Define depreciation. Why is it charged ? (b) A machine was bought for$ 9,500 and was installed by company’s workers, who were paid $ 50Ufor this. Show how it will be depreciated reducing installment and reducing instalment method assuming that its working life is 10 years. What would be its balance after 5 years, if it is depreciated@ 10% in each case.

[Ans. Balance of Machinery Account. Straight line method $ 5,000.

(educing Instalment method$. 5,905]


17. On 1-1-2005, Mrs. Neelam Sharma bought a machine for $ 25,000 on which she spent $ 5.000 for carriage and freight $ 1,000 for brokerage of the middle-man. $ 3,500 for installation and $ 500 for an iron pad. The machine is depreciated @ 10% per annum on written down value basis. After three years the machine was sold to Deepa for $ 30,500 and $ 500 was paid as ccmmission to the broker through whom the sale was effected. Find out the Profit or Loss on sale of machine if the accounts are closed on 31st December every year.

[Ans. Profit on sale of machine= $ 4,485]




18. The following information relates to the business of Maharaja Enterprises for the year ended Dec. 31. 2001.

(a)    A debit balance of plant and machinery account on Jan. 1, 2001 $ 26,840.

(b)   During the year 2001  three machines standing in the books at $ 1.286 were sold for $ 600.

(c)    On April I, 200 I new  machines costing $ 5,880 were purchased and were installed by the manufacturer’s workman at an expenditure of $ 216 (i.e., wages $ 174 and materials $ 42.)

(d)   It is practice of the business to write-off IS% depreciation to all additions to the plant during a year and 0% to all old plants. Prepare the plant and machinery account as it would appear on Dec. 31, 200 I.


[Ans. Balance of Machinery Ale $ 25,626 approximate]


19. Nagi Road Transport Corporation (NRTC) purchased 5 minibuses at $ 2,00.000 each on 1 April 2000. On 1st October, 2002. One of the buses met an accident and was completely destroyed. Insurance Co. paid $ 90.000 in full settlement of the claim. On the same day, NRTC purchased a used minibus for $ 1,00.000 and spent $  20.000 on its over/hauling. Prepare minibus account for 3 years ending on 31 Dec. 2002. The depreciation is charged @ 20% on straight line basis.


[Ans. Loss on bus destroyed 10,000: Balance of bus account $ 4,74.000]

[Ans. Loss on sale of machine $ 25.500 : Balance of Machinery Ale $ 6,00.000]