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A Company purchased a machinery on Magh 1, 2076 for Rs. 90,000 and spent Rs. 10,000 on its installation. The…

(a) A Company purchased a machinery on Magh 1, 2076 for Rs. 90,000 and spent Rs. 10,000 on its installation. The company writes off depreciation at 15% on the diminishing value every year. At the end of Ashwin 2078, the company sold the machinery at Rs. 80,000 and purchased new machinery for Rs. 120,000. The books are closed on 31st Chaitra every year.

Required: Machinery account for 2076 to 2078

(b) Define depreciation. Write in brief about the reasons for depreciating long-lived assets.

Solution

(b)

Depreciation is the fall in the value and usefulness of a fixed asset due to constant use and the passage of time. In accounting, it is the process of spreading the cost of a fixed asset over its useful life, and it is charged as an expense in the income statement under the matching principle. According to ICMA, London, depreciation is the diminution in the intrinsic value of an asset due to use and/or lapse of time.

The reasons or causes of depreciation are:

  1. Wear and tear: continuous use reduces the efficiency and value of an asset, as with machinery and vehicles.
  2. Exhaustion: wasting assets such as mines, quarries and oil wells lose value as their resources are extracted.
  3. Obsolescence: an asset in good physical condition can become outdated because of new inventions, better models or changes in fashion.
  4. Efflux of time: some assets lose value simply with the passage of time, such as leasehold property, patents and copyrights.
  5. Accident: an asset may lose value suddenly because of an accident such as fire or breakdown.

Charging depreciation shows the true profit (through matching) and the true value of assets in the balance sheet, and it also reduces taxable income.

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  1. 1.

    Describe the users of accounting information. Why do they need such information? Explain.

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  2. 2.

    An unadjusted trial balance of a company is given below

    Particulars Debit (Rs.) Credit (Rs.)
    Cash 200,000
    Bank 250,000
    Discount Allowed 6,000
    Machinery 200,000
    Purchases 200,000
    Debtors 80,000
    Promotional expenses 20,000
    Salary 60,000
    Pre-paid rent 39,000
    Share Capital 500,000
    Creditors 45,000
    Commission Received 10,000
    Revenue/Sales 500,000
    Total 1,055,000 1,055,000

    Adjustment:

    a. Closing stock Rs. 30,000

    b. Prepaid rent expired was Rs. 39,000

    c. Depreciation on Machinery at 15% per annum

    Required:

    i. Adjusted Trail balance

    ii. Statement of Profit and Loss a/c as per NFRS

    iii. Statement of Financial Position as per NFRS

    iv. Statement of Cash flow Statement as per NFRS

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  3. 3.

    Following are the transaction a consultant agency during the month of Baishakh:

    Baishakh 1: Collected Rs. 1,000,000 from owners of the agency in exchange of shares.

    Baishakh 2: Deposited into bank Rs. 800,000

    Baishakh 5: Paid 3 month's rent in advance Rs. 30,000

    Baishakh 8: Purchased office equipment for Rs. 100,000 and paid 20% of cash and balance through cheque.

    Baishakh 10: Billed to customers for service provided Rs. 200,000

    Baishakh 12: Purchased office supplies Rs. 45,000

    Baishakh 14: Received Rs. 190,000 after deduction of 5% discount from the customers billed on Baishakh 10

    Baishakh 20: Paid Rs. 10,000 to the advertising company.

    Baishakh 25: Paid electricity bill of Rs. 2,000.

    Baishakh 30: Paid office salary Rs. 50,000 by issuing cheques.

    Required:

    a. Journal Entries for the above transactions

    b. Triple Column Cash book

    c. Cash, Bank, Accounts Receivable and Account Payable Account

    d. Trial Balance

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  4. 4.

    What is cash flow statement? Why it is important for the organization?

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  5. 5.

    Define financial statement analysis. Explain the objectives of financial statement analysis.

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  6. 6.

    (a) On 30th Poush 2079, the bank statement of Info-Tech Company showed a balance of Rs. 11,400 and cash book showed the balance of Rs. 10,000. Other data are:

    A cheque of Rs. 2,100 deposited but recorded by bank as Rs. 1,200

    A bill receivable of Rs. 5,000 and interest of Rs. 500 collected by bank only.

    A customer's cheque for Rs. 2,000 was returned with the bank statement marked NSF

    Bank service charge for the month Rs. 200

    Deposit in transit of Rs. 6,000

    Outstanding cheque Rs. 5,000 of the month.

    Required: Bank Reconciliation statements as on 30th Poush 2079

    (b) Differentiate between capital and revenue income.

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