ZeePedia Add to Favourites   |   Contact us


Financial Statement Analysis

<<< Previous Depreciation Accounting Policies Next >>>
 
img
Financial Statement Analysis-FIN621
VU
Lesson-21
NOTES TO FINANCIAL STATEMENTS
(Continued)
Depreciation Accounting Policies.
Depreciation is the expired or used portion of a fixed asset during an accounting period.
This is taken into account to achieve the matching principle of matching revenues earned during an
accounting period with the expenses incurred during that period. Since plant assets have useful life
spreading over a number of accounting periods, the portion used in one accounting period is charged to
Income Statement of that accounting period in the form of Depreciation Expense.
Land is recorded at cost, other fixed assets are recorded at Book Value i.e. cost less
accumulated depreciation. For this, separate Depreciation Expense and Accumulated Depreciation
Accounts for different plant assets are maintained. It must also be noted that depreciation is a process of
cost allocation and not a process of valuation as such.
Computing Depreciation
Different methods are available for computing depreciation of fixed assets. Different
methods can be used for different assets. However, comparison among firms with different depreciation
methods becomes difficult because of the fact that each firm uses different methods for calculating
depreciation, which ultimately affect its net income and balance sheet.
Methods of Computing Depreciation
Straight-line method: In this, the depreciation expenses are spread evenly
over
i)
periods. Assume that a plant asset is acquired for Rs.17, 000. It is estimated that its
useful life is five years and residual value (salvage value) at the end of five years is
Rs.2, 000.
Depreciation is a systematic allocation of the cost of a depreciable asset to expense over its useful life. It
is a process of charging the cost of fixed asset to profit & loss account.
Fixed Assets are those assets which are:
·  Of long life
·  To be used in the business to generate revenue
·  Not bought with the main purpose of resale.
Fixed assets are also called "Depreciable Assets"
When an expense is incurred, it is charged to profit & loss account of the same accounting period in
which it has incurred. Fixed assets are used for longer period of time. Now, the question is how to
charge a fixed asset to profit & loss account. For this purpose, estimated life of the asset is determined.
Estimated useful life is the number of years in which a fixed asset is expected to be used efficiently. It is
the life for which a machine is estimated to provide more benefit than the cost to run it. Then, total cost
of the asset is divided by total number of estimated years. The value, so determined, is called
`depreciation for the year' and is charged to profit & loss account. The same amount is deducted from
total cost of fixed asset in the financial year in which depreciation is charged. The net amount (after
deducting depreciation) is called `Written down Value'.
WDV = Original cost of fixed asset ­ Accumulated Depreciation
79
img
Financial Statement Analysis-FIN621
VU
Accumulated Depreciation is the depreciation that has been charged on a particular asset from the time
of purchase of the asset to the present time. This is the amount that has been charged to profit and loss
account from the year of purchase to the present year.
Depreciation accumulated over the years is called accumulated depreciation.
Useful Life
·  Useful Life or Economic Life is the time period for machine is expected to operate efficiently.
·  It is the life for which a machine is estimated to provide more benefit than the cost to run it.
Grouping of Fixed Assets
Major groups of Fixed Assets:
·  Land
·  Building
·  Plant and Machinery
·  Furniture and Fixtures
·  Office Equipment
·  Vehicles
No depreciation is charged for `Land'. In case of `Leased Asset/Lease Hold Land' the amount paid for it
is charged over the life of the lease and is called Amortization.
Journal entries for recording Depreciation
Purchase of fixed asset:
Debit:
Relevant asset account
Credit:
Cash, Bank or Payable Account
For recording of depreciation, following two heads of accounts are used:
·  Depreciation Expense Account
·  Accumulated Depreciation Account
Depreciation expense account contains the depreciation of the current year. Accumulated depreciation
contains the depreciation of the asset from the financial year in which it was bought up to the present
financial year. . Depreciation of the following years in which asset was used is added up in this account.
In other words, this head of account shows the cost of usage of the asset up to the current year.
Depreciation account is charged to profit & loss account under the heading of Administrative Expenses.
In the balance sheet, fixed assets are presented at written down value i.e.
WDV = Actual cost of fixed asset ­ Accumulated Depreciation.
Journal entry for the depreciation is given below:
Debit: Depreciation Expenses Account
Credit:
Accumulated Depreciation Account
Presentation of Depreciation
Charging depreciation to any head in profit & loss account depends upon the nature of work performed
by the asset. Consider an organization has purchased computers. If computers are being used by the
management, this means that administrative work is done by computers. So, depreciation of computers
will be charged to Administrative Expenses. On the other hand, if machines working in the factory are
80
img
Financial Statement Analysis-FIN621
VU
computerized. The value of depreciation of the computers attached with the machines will be charged to
cost of goods sold. The reason being, the computers are the part of manufacturing process &
depreciation of computers will be charged to the cost of production. Again consider the selling
department of the business is very large. Depreciation of computers used in selling department will be
charged to selling expenses.
You can see that computer is a single asset and its depreciation is charged in three different heads
depending upon the nature of work done by the computer.
Depreciation for the year is charged to:
i.
Cost of Goods Sold
ii.
Administrative Expenses
iii.
Selling Expenses
In balance sheet Fixed Assets are shown at Cost less Accumulated Depreciation i.e. written Down Value
(WDV).
Methods of calculating Depreciation
There are several methods for calculating depreciation. At this stage, we will discuss only two of them
namely:
·  Straight line method or Original cost method or Fixed installment method
·  Reducing balance method or Diminishing balance method or written down method.
Straight Line Method
Under this method, a fixed amount is calculated by a formula. That fixed amount is charged every year
irrespective of the written down value of the asset. The formula for calculating the depreciation is given
below:
Depreciation = (cost ­ Residual value) / Expected useful life of the asset
Residual value is the cost of the asset after the expiry of its useful life.
Under this method, at the expiry of asset's useful life, its written down value will become zero. Consider
the following example:
·
Cost of the Asset
= Rs.100,000
·
Life of the Asset
= 5 years
·
Annual Depreciation
= 20 % of cost or Rs.20,000
Written down value method
·
Cost of the Asset
= Rs. 100,000
·
Annual Depreciation
= 20%
Year 1 Depreciation
= 20 % of 100,000
= 20,000
Year 1 WDV
= 100,000 ­ 20,000
= 80,000
Year 2 Depreciation
= 20 % of 80,000
= 16,000
Year 2 WDV
= 80,000 ­ 16,000
= 64,000
Illustration:
Cost of an asset:
Rs. 120,000
Residual value: Rs. 20,000
Expected life: Rs. 5 years
81
img
Financial Statement Analysis-FIN621
VU
Calculate depreciation and the written down value of the asset for five years.
Solution
Straight line method
Depreciation = (120,000 ­ 20,000) / 5 = Rs. 20,000
Particulars
Depreciation
Written
(Rs)
Down
Value
(Rs.)
100,000
Depreciable cost
Dep. Of the 1st year
80,000
(20,000)
Dep. Of the 2nd year
60,000
(20,000)
Dep. Of the 3rd year
40,000
(20,000)
Dep. Of the 4th year
20,000
(20,000)
Dep. Of the 5th year
0
(20,000)
Reducing Balance Method
Under this method, depreciation is calculated on written down value. In the first year, depreciation is
calculated on cost. Afterwards written down value is calculated by deducting accumulated depreciation
from the cost of that asset(cost ­ accumulated depreciation) and depreciation is charged on that value. In
this method, the value of asset never becomes zero. Consider the following example:
Cost of an asset
Rs. 100,000
Expected life
Rs. 5 years
Depreciation rate
20%
Solution
Particulars
Depreciation
Accumulated
Written
(Rs)
Depreciation
Down
(Rs.)
Value
(Rs.)
100,000
Depreciable cost
Dep. Of the 1st year
80,000
20,000
20,000
100,000 x 20%
Dep. Of the 2nd year
64,000
36,000
16,000
80,000 x 20%
Dep. Of the 3rd year
51,200
48,800
12,800
64,000 x 20%
Dep. Of the 4th year
40,960
59,040
10,240
51,200 x 20%
Dep. Of the 5th year
32,768
67,232
8,192
40,960 x 20%
You see, at the end of five years, WDV of the asset is Rs. 32,768, not zero. But in case of straight line
method, the WDV, after five years was zero. So, in the opinion of some people, reducing balance
82
img
Financial Statement Analysis-FIN621
VU
method is better than that of straight line method, but both methods are effective. It is the management
that has to decide, which method is best suited to their business.
Once an asset has been fully depreciated, no more depreciation should be recorded on it, even though
the property may be in good condition and may be in use. The objective of depreciation is to spread the
cost of an asset over the periods of its usefulness; in no case can depreciation be greater than the amount
paid for the asset. When a fully depreciated asset is in use beyond the original estimate of useful life, the
asset account and the accumulated depreciation account should remain in the accounting records
without further entries until the asset is retired.
Reducing Balance Method
In this method, depreciation is calculated on written down value. In the first year, depreciation is
calculated on cost. Afterwards written down value is calculated by deducting accumulated depreciation
from the cost of that asset (cost ­ accumulated depreciation) and depreciation is charged on that value.
Cost of Asset ­ Price at which the asset was initially recorded
Written Down Value / Book Value ­ Cost minus Accumulated Depreciation.
In reducing balance method, a formula is used for calculation the depreciation rate i.e.
Rate = 1 ­
n RV / C
Where:
"RV" = Residual Value
"C" = Cost
"n" = Life of Asset
Calculate the rate if:
Cost
= 100,000
Residual Value (RV)
= 20,000
Life
= 3 years
Rate =
1­3
20000/100000
= 42%
Year 1
Cost
100,000
Depreciation  100,000 x 42%
(42,000)
WDV  (Closing Balance)
58,000
Year 2
WDV  (Opening Balance)
58,000
Depreciation
58,000 x 42%
(24,360)
WDV  (Closing Balance)
33,640
Year 3
WDV  (Opening Balance)
33,640
Depreciation
33,640 x 42%
(14,128)
WDV  (Closing Balance)
19,511
Disposal of Asset
83
img
Financial Statement Analysis-FIN621
VU
Cost of Asset
= 100,000
Life of the Asset
= 5 Years
Depreciation Method
= Straight Line
Residual Value
= Rs.10000
Sale Price after Five Years
= Rs.15000
Depreciation per year = (100000-10000) / 5
= Rs.5000 per year
Total Depreciation in Five Years
= 18,000 x 5
= 90,000
Book Value after Five Years
= 100,000- 90,000
= 10,000
Profit on Disposal
= 15,000 ­ 10,000
= Rs.5000
Recording of Disposal
Debit
Fixed Asset Disposal A/c
100,000
Credit
Fixed Asset Cost A/c
100,000
(With the cost of asset)
Debit
Accumulated Dep. A/c
90,000
Credit
Fixed Asset Disposal A/c
90,000
(With the depreciation accumulated to date)
Debit
Cash / Bank / Receivable A/c
15,000
Credit
Fixed Asset Disposal A/c
15,000
(With the price at which asset is sold)
[Note: one group to appear at a time]
Disposal of Asset Account
Fixed Asset Disposal Account
Debit
Credit
Cost Account
100,000
Acc. Dep. Account
90,000
Cash / Bank
15,000
P & L Account
5000
( Balancing Figure)
Total
105000
Total
105000
Policy for Depreciation
84
img
Financial Statement Analysis-FIN621
VU
The management of the business selects the policy for charging depreciation. There is no law binding on
the management. The management is free to choose method of depreciation and policy of charging
depreciation. Normally two policies are commonly used:
·  Depreciation on the basis of use
·  In the year of purchase, full year's depreciation is charged; where as, in the year of sale no
depreciation is charged.
Now it is up to the management to decide, what method and what policy is better and effective for their
business.
Disposal of Fixed Asset
When depreciable asset is disposed off at any time during the financial year, an entry should be made to
give effect of the disposal. Since, the residual value of asset is only estimated; it is common for asset to
be sold at price that differs from its book value at the date of disposal. When asset is sold, any profit or
loss is computed by comparing book value with the amount received from sale. As you know, book
value is obtained by deducting accumulated depreciation from original cost of the asset. A sale price in
excess of the book value produces profit; a sale price below the book value produces loss. This profit or
loss should be shown in the profit & loss account.
Entries for Recording Disposal
Debit
Fixed Asset Disposal A/c
Credit
Fixed Asset Cost A/c
(With the cost of asset)
Debit
Accumulated Dep. A/c
Credit
Fixed Asset Disposal A/c
(With the depreciation accumulated to date)
Debit
Cash / Bank / Receivable A/c
Credit
Fixed Asset Disposal A/c
(With the price at which asset is sold)
Example
·
An asset is purchased for Rs. 500,000 on Nov. 01, 2001.
·
Depreciation rate is 10% p.a.
·
The Asset is sold on Apr. 30, 2004.
·
Financial Year is July 1 to June 30
Question
·  Calculate the WDV For both policies
85
img
Financial Statement Analysis-FIN621
VU
Depreciation is charged on the Basis of Use
Year
On the Basis of Use
Rs.
1-11-2001
Cost
500,000
2001-2002
Dep. 500,000 x 10% x 8 / 12
(33,333)
30-6-2002
WDV
466,667
2002-2003
Dep. 466,666 x 10%
(46,667)
30-6-2003
WDV
420,000
2003-2004
Dep. 420,000 x 10% x 10 / 12
(35,000)
30-4-2004
WDV
385,000
Full Depreciation in the Year of Purchase
Year
Full Dep. in year of Purchase
Rs.
1-11-2001
Cost
500,000
2001-2002
Dep. 500,000 x 10%
(50,000)
30-6-2002
WDV
450,000
2002-2003
Dep. 450,000 x 10%
(45,000)
30-6-2003
WDV
405,000
2003-2004
Dep. 00 in the year of sale
00
30-6-2004
WDV
405,000
Contents of Fixed Assets Register
·  Different record for each class of assets
·  Date of purchase
·  Detailed particulars of asset
·  Location of asset
·  Record of depreciation
Illustration
Cost of asset
Rs. 200,000
Life of the asset
5 years
Depreciation method
Straight line
Residual value
Rs. 20,000
Sale price after 5 years 30,000
Calculate profit/Loss on the sale of the asset?
86
img
Financial Statement Analysis-FIN621
VU
Solution
Written down value = 200,000 ­ 20,000 = 180,000
Depreciation/year = 180,000/5 = 36,000 (Straight line method)
Particulars
Depreciation (Rs)
Written
Down
Value (Rs.)
200,000
Depreciable cost
Dep. Of the 1st year
164,000
(36,000)
Dep. Of the 2nd year
128,000
(36,000)
Dep. Of the 3rd year
92,000
(36,000)
Dep. Of the 4th year
56,000
(36,000)
Dep. Of the 5th year
20,000
(36,000)
Book value after five years
Rs. 20,000
Sale price
Rs. 30,000
Profit on sale
Rs. 10,000 (30,000 ­ 20,000)
Same illustration is solved by reducing balance method
Cost of asset
Rs. 200,000
Residual value
Rs. 20,000
Estimated useful life
5 years
Calculation of depreciation rate
____
n
Depreciation Rate = 1 ­ Rv/c
_____________
5
= 1 - 20,000/200,000
= 37%
Allocation of depreciation is given below:
Particulars
Depreciation (Rs)
Accumulated
Written Down
Depreciation
Value (Rs.)
(Rs.)
200,000
Depreciable cost
Dep. Of the 1st year
126,000
74,000
74,000
200,000 x 37%
Dep. Of the 2nd year
79,380
120,620
46,620
126,000 x 37%
Dep. Of the 3rd year
50,009
149,991
29,371
79,380 x 37%
Dep. Of the 4th year
31,506
168,494
18,503
50,009 x 37%
Dep. Of the 5th year
19,849
180,151
11,657
31,506 x 37%
Book value after five years
Rs. 19,849
Sale price
Rs. 30,000
Profit on sale
Rs. 10,151 (30,000 ­ 19,849)
87
img
Financial Statement Analysis-FIN621
VU
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset
up to the balance sheet date are transferred to an account called Capital Work in Progress Account.
This account is shown separately in the balance sheet below the fixed asset. Capital work in progress
account contains all expenses incurred on the asset until it is converted into working condition. All these
expenses will become part of the cost of that asset. When an asset is completed and it is ready to work,
all costs in the capital work in progress account will transfer to the relevant asset account through the
following entry:
Debit:
Relevant asset account
Credit:
Capital work in progress account
Illustration # 1
A machine is purchased for Rs. 400,000. Its useful life is estimated to be five years. Its residual value is
Rs. 25,000. After four years, it was sold for Rs. 40,000. For the purpose of WDV, its depreciation rate is
40%.
You are required to show calculation of depreciation for four years. Also calculate profit or loss on
disposal.
Solution
Calculation of depreciation and profit & loss on the basis of straight line method:
Depreciation/year = (400,000 ­ 25,000)/5 = 75,000 (Straight line method)
As, machine was sold after four years but its useful life was estimated for five years, when we calculate
depreciation of the asset under straight line method, we will divide its WDV over five years, not on four
years.
Particulars
Depreciation (Rs)
Written Down Value
(Rs.)
375,000
Depreciable cost
Dep. Of the 1st year
300,000
(75,000)
Dep. Of the 2nd year
225,000
(75,000)
Dep. Of the 3rd year
150,000
(75,000)
Dep. Of the 4th year
75,000
(75,000)
Book value after four years
Rs. 75,000
Sale price
Rs. 40,000
Profit/(loss) on sale
Rs. (35,000) i-e.(40,000 ­ 75,000)
88
img
Financial Statement Analysis-FIN621
VU
Calculation of depreciation and profit & loss on the basis of reducing balance method:
Depreciation rate = 40%
Particulars
Depreciation
Accumulated
Written
(Rs)
Depreciation
Down
(Rs.)
Value (Rs.)
400,000
Depreciable cost
Dep. Of the 1st year
240,000
160,000
160,000
400,000 x 40%
Dep. Of the 2nd year
144,000
256,000
96,000
240,000 x 40%
Dep. Of the 3rd year
86,400
313,600
57,600
144,000 x 40%
Dep. Of the 4th year
51,840
348,160
34,560
86,400 x 40%
Book value after four years
Rs. 51,840
Sale price
Rs. 40,000
Profit/ (loss) on sale
Rs. (11,840) i-e. (40,000 ­ 51,840)
Illustration # 2
Following information of machinery account is available in Year 2004:
·  Machine # 1 is purchased on September 1, 2000 for Rs. 100,000
·  Machine # 2 is purchased on January 31, 2002 for Rs. 200,000
·  Machine # 3 is purchased on July 1, 2003 for Rs. 50,000
·  Machine # 1 is disposed on March 31, 2004
Depreciation is charged @ 25% reducing balance method. Financial year is closed on June 30 every
year.
Show the calculation of depreciation on machinery for four years using the following policies:
·  Depreciation is charged on the basis of use
·  Full depreciation is charged in the year of purchase and no depreciation is charged in the year
of disposal.
Solution
Depreciation on the basis of use
Depreciation
Accumulated
Total
Written
Total
Date
Purchase
(Rs.)
depreciation
Accum.
Down Value Written
of
(Rs.)
Dep.
(Rs.)
Down
machine
Value
(Rs.)
(Rs.)
01-09-2000
100,000
Machine # 1
Machine # 1
20,833
Machine # 1  79,167
100,000 x 25%
20,833
79,167
x10/12=20,833
238,542
61,458
Machine # 1
Machine # 1
Machine # 1
2001-2002
59,375
40,625
79,167x25%
= 19,792
Machine # 2
Machine # 2
Machine # 2
200,000
31-01-2002
89
img
Financial Statement Analysis-FIN621
VU
200,000x25%x5
20,833
179,167
/12=20,833
178,906
121,094
Machine # 1
Machine # 1
2002-2003
Machine # 1
44,531
55,469
59,375x25%
= 14,844
Machine # 2
Machine # 2
Machine # 2
134,375
65,625
179,167x25%
=44,792
175,538
Machine # 1
138,281
Machine # 1
Machine # 1
2003-2004
63,819
44,531x25%x
(36,181)
9/12= 8,350
(sold)
Machine # 2
Machine # 2
Machine # 2
99,219
100,781
134,375x25%
= 33,594
Machine # 3
Machine # 3
Machine # 3
50,000
01-07-2003
12,500
37,500
50,000x25%
= 12,500
Figure in blue color is the written down value of machine # 1, which is disposed of by the management.
90
img
Financial Statement Analysis-FIN621
VU
Full year depreciation in the year of purchase and no depreciation in the year of sale:
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000
Machine # 1
Machine # 1
25,000
Machine # 1
75,000
100,000 x 25%
25,000
75,000
=25,000
206,250
93,750
Machine # 1
Machine # 1
Machine # 1
2001-2002
56,250
43,750
75,000x25%
= 18,750
Machine # 2
Machine # 2
200,000
Machine # 2
31-01-2002
150,000
50,000
200,000x25%
=50,000
154,687
145,313
Machine # 1
Machine # 1
2002-2003
Machine # 1
42,187
57,813
56,250x25%
= 14,063
Machine # 2
Machine # 2
Machine # 2
112,500
87,500
150,000x25%
=37,500
121,875
185,935
Machine # 1
Machine # 1
Machine # 1
2003-2004
42,187
57,813
0
(sold)
(sold)
Machine sold
Machine # 2
Machine # 2
Machine # 2
84,375
115,625
112,500x25%
= 28,125
Machine # 3
Machine # 3
Machine # 3
50,000
01-07-2003
37,500
12,500
50,000x25%
= 12,500
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset
up to the balance sheet date are transferred to an account called Capital Work in Progress Account.
This account is shown separately in the balance sheet below the fixed asset. Capital work in progress
account contains all expenses incurred on the asset until it is converted into working condition. All these
expenses will become part of the cost of that asset. When any expense is incurred or paid, it is included
in the Capital Work in Progress Account through the following entry:
Debit:
Work in Progress Account
Credit:
Cash/Bank/Payable Account
When an asset is completed and it is ready to work, all costs will transfer to the relevant asset account
through the following entry:
Debit:
Relevant asset account
Credit:
Capital work in progress account
Presentation
It is already mentioned that Work in Progress Account is shown separately in the balance sheet below
the fixed asset. i-e.
91
img
Financial Statement Analysis-FIN621
VU
Name of the Entity
Balance Sheet
As At..........
Particulars
Amount
Amount Rs.
Rs.
Assets
Fixed Assets
xyz
Capital Work in Progress
xyz
Other Long Term Assets
xyz
Current Assets
Total
Xyz
Liabilities
Capital
xyz
Profit
xyz
Xyz
Long Term Liabilities
Xyz
Current Liabilities
Total
Xyz
Consider the solved illustration in the previous lecture:
Depreciation on the basis of use
Depreciation
Accumulated
Total
Written
Total
Date
Purchase
(Rs.)
depreciation
Accum.
Down Value Written
of
(Rs.)
Dep.
(Rs.)
Down
machine
Value
(Rs.)
(Rs.)
01-09-2000
100,000
Machine # 1
Machine # 1
20,833
Machine # 1  79,167
100,000 x 25%
20,833
79,167
x10/12=20,833
238,542
61,458
Machine # 1
Machine # 1
Machine # 1
2001-2002
59,375
40,625
79,167x25%
= 19,792
Machine # 2
Machine # 2
Machine # 2
200,000
31-01-2002
179,167
20,833
200,000x25%x5
/12=20,833
178,906
121,094
Machine # 1
Machine # 1
2002-2003
Machine # 1
44,531
55,469
59,375x25%
= 14,844
Machine # 2
Machine # 2
Machine # 2
134,375
65,625
179,167x25%
=44,792
138,281
175,538
Machine # 1
Machine # 1
Machine # 1
2003-2004
(36,181)
63,819
44,531x25%x
(sold)
9/12= 8,350
Machine # 2
Machine # 2
Machine # 2
100,781
99,219
134,375x25%
= 33,594
Machine # 3
Machine # 3
Machine # 3
50,000
01-07-2003
92
img
Financial Statement Analysis-FIN621
VU
50,000x25%
12,500
37,500
= 12,500
Presentation in Balance Sheet
Year
Cost of Machinery
Accumulated
Written  Down
Depreciation
Value
2000-2001
100,000
20,833
79,167
2001-2002
300,000
61,458
238,542
2002-2003
300,000
121,094
178,906
Written down Value of the year 2003-2004
Opening Written Down Value:
178,906
Add: Cost of machine purchased:
50,000
Less: Depreciation of Machine # 1 in 2003-2004:
(8,350)
Less: Depreciation of other assets:
(46,094)
Less: Written Down Value of machine disposed:
(36,181)
Closing Written Down Value:
138,281
93
img
Financial Statement Analysis-FIN621
VU
Full year depreciation in the year of purchase and no depreciation in the year of sale:
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000
Machine # 1
Machine # 1
25,000
Machine # 1
75,000
100,000 x 25%
25,000
75,000
=25,000
206,250
93,750
Machine # 1
Machine # 1
Machine # 1
2001-2002
56,250
43,750
75,000x25%
= 18,750
Machine # 2
Machine # 2
Machine # 2
200,000
31-01-2002
150,000
50,000
200,000x25%
=50,000
154,687
145,313
Machine # 1
Machine # 1
2002-2003
Machine # 1
42,187
57,813
56,250x25%
= 14,063
Machine # 2
Machine # 2
Machine # 2
112,500
87,500
150,000x25%
=37,500
121,875
185,935
Machine # 1
Machine # 1
Machine # 1
2003-2004
42,187
57,813
0
(sold)
(sold)
Machine sold
Machine # 2
Machine # 2
Machine # 2
84,375
115,625
112,500x25%
= 28,125
Machine # 3
Machine # 3
Machine # 3
50,000
01-07-2003
37,500
12,500
50,000x25%
= 12,500
Presentation in the Balance Sheet
Year
Cost of Machinery
Accumulated
Written  Down
Depreciation
Value
2000-2001
100,000
25,000
75,000
2001-2002
300,000
93,750
206,250
2002-2003
300,000
145,313
154,687
Written down Value of the year 2003-2004
Opening Written Down Value:
Rs. 154,687
Add: Cost of machine purchased:
Rs. 50,000
Less: Depreciation of Machine # 1 in 2003-2004:
0
Less: Depreciation of other assets:
(40,625)
Less: Written Down Value of machine disposed:
(42,187)
Closing Written Down Value:
Rs. 121,875
94
img
Financial Statement Analysis-FIN621
VU
Illustration # 2
Following information of machinery account is available in Year 2004:
·  Machine # 1 is purchased on
August 1, 2000 for Rs. 50,000
·  Machine # 2 is purchased on April 1, 2002 for Rs. 100,000
·  Machine # 3 is purchased on March 1, 2004 for Rs. 150,000
·  Machine # 1 is disposed on May 31, 2004
Depreciation is charged @ 20% reducing balance method. Financial year is closed on June 30 every
year.
Show the calculation of depreciation on machinery for four years using the following policies:
·  Depreciation is charged on the basis of use
·  Full depreciation is charged in the year of purchase and no depreciation is charged in the year
of disposal,
Solution
Depreciation on the basis of use
Written
Total
Total
Date
Purchase
Depreciation
Accumulated
Down Value Written
(Rs.)
depreciation
Accum.
of
Dep.
(Rs.)
Down
(Rs.)
machine
Value
(Rs.)
(Rs.)
01-08-2000
50,000
Machine # 1
Machine # 1
9,167
Machine # 1  40,833
50,000 x 20%
9,167
9,167
x11/12=9,167
Machine # 1
22,334
Machine # 1
127,666
Machine # 1
2001-2002
17,334
32,666
40,833x20%
Machine # 2
= 8,167
5,000
Machine # 2
100,000
Machine # 2
01-04-2002
95,000
100,000x20%x3
/12=5,000
2002-2003
Machine # 1
Machine # 1
47,867
Machine # 1
102,133
32,666x20%
23,867
26,133
= 6,533
Machine # 2
Machine # 2
Machine # 2
95,000x20%
24,000
76,000
=19,000
200,800
77,858
Machine # 1
Machine # 1
Machine # 1
2003-2004
(21,342)
28,658
26,133x20%x
(sold)
11/12= 4,791
Machine # 2
Machine # 2
Machine # 2
60,800
39,200
76,000x20%
= 15,200
Machine # 3
Machine # 3
Machine # 3
150,000
01-03-2004
140,000
10,000
150,000x20%x
4/12= 10,000
95
img
Financial Statement Analysis-FIN621
VU
Presentation in the Balance Sheet
Year
Cost of Machinery
Accumulated
Written  Down
Depreciation
Value
2000-2001
50,000
9,167
40,833
2001-2002
150,000
22,334
127,666
2002-2003
150,000
47,867
102,133
Written Down Value of the year 2003-2004
Opening Written Down Value:
Rs. 102,133
Add: Cost of machine purchased:
Rs. 150,000
Less: Depreciation of Machine # 1 in 2003-2004:
(4,791)
Less: Depreciation of other assets:
(25,200)
Less: Written Down Value of machine disposed:
(21,342)
Closing Written Down Value:
Rs. 200,800
Full year depreciation in the year of purchase and no depreciation in the year of sale:
Depreciation
Accumulated
Total
Written
Total
Date
Purchase
(Rs.)
depreciation
Accum.
Down Value Written
of
(Rs.)
Dep.
(Rs.)
Down
machine
Value
(Rs.)
(Rs.)
01-08-2000
50,000
Machine # 1
Machine # 1
10,000
Machine # 1
40,000
50,000 x 20%
10,000
40,000
=10,000
112,000
38,000
Machine # 1
Machine # 1
Machine # 1
2001-2002
32,000
18,000
40,000x20%
= 8,000
Machine # 2
Machine # 2
100,000
Machine # 2
01-04-2002
80,000
20,000
100,000x20%
=20,000
89,600
60,400
Machine # 1
Machine # 1
2002-2003
Machine # 1
25,600
24,400
32,000x20%
= 6,400
Machine # 2
Machine # 2
Machine # 2
64,000
36,000
80,000x20%
=16,000
171,200
103,200
Machine # 1
Machine # 1
Machine # 1
2003-2004
(25,600)
24,400
0
(sold)
(sold)
Machine sold
Machine # 2
Machine # 2
Machine # 2
51,200
48,800
64,000x20%
= 12,800
Machine # 3
Machine # 3
Machine # 3
150,000
01-03-2004
120,000
30,000
150,000x20%
= 30,000
96
img
Financial Statement Analysis-FIN621
VU
Presentation in the Balance Sheet
Year
Cost of Machinery
Accumulated
Written  Down
Depreciation
Value
2000-2001
50,000
10,000
40,000
2001-2002
150,000
38,000
112,000
2002-2003
150,000
60,400
89,600
Written Down Value of the year 2003-2004
Opening Written Down Value:
Rs. 89,600
Add: Cost of machine purchased:
Rs. 150,000
Less: Depreciation of Machine # 1 in 2003-2004:
0
Less: Depreciation of other assets:
(42,800)
Less: Written Down Value of machine disposed:
(25,600)
Closing Written Down Value:
Rs. 171,200
Revaluation of Fixed Assets
Fixed assets are purchased to be used for longer period. In the subsequent years, the value of asset could
be higher or lower than its present book value due to inflationary condition of the economy. Assets are
valued at Historical Cost in the books of accounts. Historical Cost is the original cost of the asset at
which it was purchased plus additional costs incurred on the asset to bring it in working condition.
Sometimes, the management of the business, if it thinks fit, revalues the asset to present it on current
market value. Once the asset is revalued to its market value, then its value has to be constantly
monitored to reflect the changes in the market value.
If an asset is revalued at higher cost than its original cost, the excess amount will be treated as profit on
revaluation of fixed assets and it is credited to Revaluation Reserve Account.
On the other hand, if an asset is revalued at lower cost than its original cost, the balance amount will be
treated as loss on revaluation of fixed assets and it is shown in the profit & loss account of that year in
which asset was revalued.
97