FINAL ACCOUNTS IIIUSTRATIONS PART 3

Illustration 16 :

A firm is willing to change the system of providing for depreciation from Diminishing Balance Method to Straight Line Method with retrospective effect from 1st April, 1995. On 1st April, 1997, Machinery Account in the Ledger had a debit balance of Rs. 5,67,000. The rate of depreciations would, however, remain unchanged. Necessary adjustments for depreciations due to change in method should be made in the year 1997-98. Rate of Depreciation 10% p.a.

You are further informed that new machinery were purchased on 1st October, 1997 at a cost of Rs. 60,000.

Show the Machinery Account from 1995-96 to 1997-98.

Solution :

Cost of Machinery on 1st April, 1995

_Rs. 5,67,000 × ¹⁰⁰₉₀ × ¹⁰⁰₉₀ = Rs. 7,00,000 _.

Dr.	Machinery Account		Cr.
Particulars	Rs.	Particulars	Rs.

1.4.95–31.3.96
	To Balance	7,00,000
		7,00,000
1.4.96 – 31.3.97
	To Balance b/d.	6,30,000
		6,30,000
1.4.97–	31.3.98
	To Balance b/d.	5,67,000
1.10.97 To Bank (Addition)		60,000

6,27,000

By Depreciation (on
Rs. 7,00,000 @ 10%)		70,000
Balance c/d		6,30,000
		7,00,000
By Depreciation (on
Rs. 6,30,000 @ 10%)		63,000
By Balance c/d.		5,67,000
		6,30,000
By Depreciation
(due to change in Method)		7,000
By Depreciation :
(i)  On Rs. 7,00,000
@ 10% p.a.		70,000
(ii)  On 60,000 for 6 months
@ 10% p.a.		3,000
By Balance c/d		5,47,000
		6,27,000

Depreciation provided on reducing system :
1995-96	Rs.	70,000
1996-97	Rs.	63,000
	Rs.
		1,33,000

Depreciation to be provided on Straight Line Method :

1995-96	Rs.	70,000
1996-97	Rs.	70,000
	Rs.
Deprn. short to be provided for		1,40,000
(Rs. 1,40,000 – Rs. 1,33,000)	Rs.	7,000

Illustration 17 :

Depreciation has been charged for the years 1998 to 2001 at 10% on reducing balance method on opening balance of each item of plant and machinery in use. The balance of Plant and Machinery Account on 31st December, 2001 was Rs. 54,000. There were no sales during these years but purchases were Rs. 16,800 on September, 1998 and Rs. 11,400 in December, 2000.

The management decided that depreciation should be charged at 20% on the same method but calculated on the closing balance of each year with retrospective effective from 1998.

You are required to pass Journal Entry for giving effect to the revised basis at the end of 2001, and prepare Plant and Machinery Account and Revised Plant and Machinery Account for all the years.

Solution :

The balance of Plant and Machinery Account as on January, 1998 is not given. This balance is to be ascertained by working reverse way from 2001.

Dr.		Plant and Machinery Account			Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
1998			1998
1-Jan   To	Balance b/d	48,000	31-Dec   By	Depreciation (1/9 of
To	Bank A/c	16,800		Rs. 60,000 – Rs. 16,800)
				= 43,200	4,800
			By	Balance c/d	60,000
		64,800			64,800

1999				1999
1-Jan	To	Balance b/d	60,000	31-Dec	By	Depreciation (1/9 of
						Rs. 54,000)	6,000
					By	Balance c/d	54,000
			60,000				60,000
2000				2000
1-Jan	To	Balance b/d	54,000	31-Dec	By	Depreciation (1/9 of
Dec	To	Bank A/c	11,400			48,600 = (Rs. 60,000
						– Rs. 11,400)	5,400
					By	Balance c/d	60,000
			65,400				65,400
2001				2001
1-Jan	To	Balance b/d	60,000	31-Dec	By	Depreciation (1/9 of
						Rs. 54,000)	6,000
					By	Balance c/d	54,000
			60,000				60,000

When deprn. is calculated on the revised basis, the Plant and Machinery Account will be as under :

Dr.			Revised Plant and Machinery				Cr.
Date		Particulars	Rs.	Date		Particulars	Rs.
1998				1998
1-Jan	To	Balance b/d	48,000	31-Dec	By	Deprn. (20% on 64,800)	12,960
1-Sep	To	Bank A/c	16,800		By	Balance	51,840
			64,800				64,800
1999				1999
1-Jan	To	Balance b/d	51,840	31-Dec	By	Deprn. (20% on 51,840)	10,368
					By	Balance c/d	41,472
			51,840				51,840
2000				2000
1-Jan	To	Balance b/d	41,472	31-Dec	By	Deprn. (20% on 52,872)	10,574
Dec To Bank A/c			11,400		By	Balance c/d	42,298
			52,872				52,872
2001				2001
1-Jan	To	Balance b/d	42,298	31-Dec	By	Deprn. (20% on 42,298)	8,460
					By	Balance c/d	33,838
			42,298				42,298

The resultant impact on P & L A/c of Rs. 20,162 to be disclosed in notes on Accounts.

		Deprn. @ 10%	Residual value		Deprn.@20%	Residual value
		Rs.		Rs.	Rs.	Rs.
31-Dec-01		6,000		54,000	8,460	33,838
31-Dec-00		5,400		60,000	10,574	42,298
31-Dec-00				65,400
31-Dec-99		6,000		54,000	10,368	41,472
31-Dec-98		4,800		60,000	12,960	51,840
31-Sep-98				64,800
01-Jan-98				48,000
		22,200			42,362
		Difference		Rs.	20,162
				Journal Entry
31-Dec-01 Depreciation A/c					Dr.	2,460
Prior period Adj. A/c					Dr.	17,702
(Deprn. for previous years)
To Plant & Machinery A/c						20,162

(Being arrear provision of depreciation chargeable at the revised rate of 20% and charged @ 10% for the years 1998 to 2000 and (Rs.33,902 – Rs.16,200) for the year 2001 (Rs. 8,460 – Rs. 6,000) already charged)

Illustration 18 :

(a)        What are the different methods of providing depreciation ? Is it necessary to provide depreciation ? If yes, then what are the reasons ?

(b)        XYZ Limited purchased on 1st January, 1990 second hand plant for Rs.90,000 and immediately spent Rs.60,000 in overhauling it. On 1st July 1990 additional machinery at a cost of Rs.75,000 was purchased. On 1st July 1992 the plant purchased on 1st January 1990 became obsolete and was sold for Rs.30,000. On that date new machinery was purchased at a cost of Rs.1,80,000.

Depreciation was provided annually on 31st December at 10% per annum on the original cost of asset. In 1993 however the company changed this method for depreciation and adopted the method of writing off 15% on the diminishing value. Show the Plant & Machinery Account as it would appear in the books of the company for the year 1990 to 1995.

Solution (a) :

There are various methods of providing depreciation, these are —

i)       Straight Line Method or Fixed Installment Method.

ii)      Diminishing/Reducing value Method.

iii)      Annuity Method.

iv)       Insurance Policy Method.

v)       Revaluation Method.

vi)       Unit Charging System Method.

vii)      Machine Hour Rate Method.

Yes, it is necessary to provide depreciation on fixed assets the lives of which are extinguished gradually owing to wear and tear, efflux of time, etc.

The capital expenditure incurred on acquisition of fixed asset is not charged as such in the revenue account in the concern in any year. Since the concern is utilising the asset for its business purpose, the revenue account for a year should share reasonably chargeable proportionate cost thereof. Depreciation is that reasonable charge on the profit and it is not appropriation of the profit. The Companies Act also stipulates that depreciation should be provided. If depreciation is not provided by a concern the true and fair picture of the working results will be vitiated and the Auditor will have to make a comment on that in his report.

Solution (b) :

Books of XYZ Ltd.

		Plant & Machinery Account
1990			1990
Jan. 1	To Bank A/c	90,000	Dec.31   By Depreciation	18,750
July 1	“  Bank A/c- overhauling	60,000	“  Balance c/d	2,06,250
	“ Bank A/c	75,000
		2,25,000		2,25,000

1991
Jan. 1	To Balance c/d		2,06,250
			2,06,250
1992
Jan.1	To	Balance b/d	1,83,750
July 1	“	Bank A/c	1,80,000
			3,63,750

1991
Dec. 31	By Depreciation		22,500
Dec. 31	“ Balance c/d		1,83,750
			2,06,250
1992
July 1	By Bank A/c - Sale proceeds
	plant purchased on 1.1.90		30,000
Dec.31	“	Depreciation A/c	24,000
	“  Profit & Loss A/c		82,500
	“	Balance c/d	2,27,250
			3,63,750

1993			1993
July 1	To Bank c/d	2,27,250	Dec.31	By Depreciation A/c		34,089
		.		“	Balance c/d	1,93,161
		2,27,250				2,27,250
1994			1994
Jan.1	To Balance b/d	1,93,161	Dec. 31	By Depreciation A/c		28,974
				“	Balance c/d	1,64,187
		1,93,161				1,93,161
1995			1995
Jan.1	To Balance b/d	1,64,187	Dec.31	By Depreciation		24,628
				“	Balance c/d	1,39,559
		1,64,187				1,64,187

Working Notes : —
(1)	Depreciation for the year 1990 (Rs. 18,750) :		Rs.
	On cost of Plant :	90,000 @ 10% for full year	9,000
		60,000@ 10% for full year	6,000
		75,000 @ 10% for 1/2 of year	3,750
			18,750

(2)                   Depreciation for the year 1992 :

On plant sold	1,50,000 @ 10% for 1/2 of year	7,500
On plant purchased	75,000 for full year	7,500
On plant purchased	1,80,000 for 1/2 year	9,000
		24,000

(3)                   Loss on sale of plant (Rs. 82,500) :

Cost of plant	90,000
Add : Overhauling	60,000	1,50,000
Less : Depreciation -
For the year 1990	15,000
For the year 1991	15,000
For the year 1992(1/2)	7,500	37,500	1,12,500
Less : Amount realised on Sale		30,000

82,500

NOTE: Regarding the change in the method of calculating depreciation reference may be made to AS - 6.

Illustration 19 :

On 1.1.93 Machinery was purchased by X for Rs. 50,000. On 1.7.94 additions were made to the extent of Rs. 10,000. On 1.4.95 further additions of Rs. 6,400 were made on 30th June 1996. Machinery original value of which was Rs. 8,000 on 1.1.93 was sold for Rs. 6,000. Depreciation is charged at 105 p.a. on original cost.

Show the Machinery Account for the years 1993 to 1996 in the books of X who closes his books on 31st December every year.

Solution :

In the Books of X

Dr.			Machinery Account				Cr.
Date		Particulars	Rs.	Date		Particulars	Rs.
1.1.93	To	Bank A/c-Purchase	50,000	31.12.93	By	Depreciation A/c	5,000
			.		By	Balance c/d	45,000
			50,000				50,000
1.1.94	To	Balance b/d	45,000	31.12.94	By	Depreciation A/c	5,500
1.7.94	To	Bank-Purchase	10,000		By	Balance c/d	49,500
			55,000				55,000
1.1.95	To	Balance b/d	49,500	31.12.95	By	Depreciation A/c	6,480
1.4.95	To	Bank-Purchase	6,400		By	Balance c/d	49,420
			55,900				55,900
1.1.96	To	Balance b/d	49,420	30.6.96	By	Bank A/c (Sale)	6,000
30.6.96	To	P/L A/c-Profit on Sale	800	31.12.96	By	Depreciation A/c	6,240
			.		By	Balance c/d	37,980
			50,220				50,220
1.1.97	To	Balance b/d	37,980

Working Notes :

Rs.                        Rs.

1.       Annual depreciation —

a.	For 1993
	Depreciation @ 10% on Rs. 50,000		5,000
b	For 1994
	1st Machine @ 10% on Rs. 50,000	5,000
	2nd Machine @ 10% on Rs.10,000 for 6 mths	500	5,500
c.	For 1995
	1st Machine @ 10% on Rs. 50,000	5,000
	2nd Machine @ 10% on Rs. 10,000	1,000
	3rd Machine @ 10% on Rs. 6,400 for
	9 months 6,400×10/100×9/12	480	6,480
d.  1st M/c @ 10% on (50,000 – 8,000) = Rs.42,000 =		4,200
	2nd Machine @10% on Rs. 10,000 =	1,000
	3rd Machine @ 10% on 6,400 =	640
	On selling Machine at Rs. 8,000 for 6 mths.
	Rs. 8,000×10/100×1/2 =	400	6,240

2.  Profit or loss on sale —
Original cost of Machine as on 1.1.93	8,000
Less : Deprn. @ 10% for 3×1/2 years	2,800
Value as on Selling date i.e. 30.6.96	5,200
Sales Value	6,000
So Profit on Sale (6,000 – 5.200)	800

2.6           PROVISIONS AND RESERVES

Reserves or Reserve Funds mean amounts set aside out of profits (as ascertained by the Profit and Loss Account) or other surpluses which are not meant to cover any liability, contingency, commitment or depreciation in the value of assets.

Capital Reserves :

These reserves are not available for distribution among shareholders as dividend in the case of companies. They are built out of capital profits as against ordinary trading or revenue profits. In case of a limited company, the following are capital profits :–

(a)        Profits prior to incorporation;

(b)        Premium on issue of shares or debentures;

(c)        Profits on redemption of debentures;

(d)        Amount utilised out of profits to redeem redeemable preference share;

(e)        Profit on forfeiture of shares;

(f)        Profits on sale of fixed assets over the original cost; and

(g)        Profit on revaluation of fixed assets or liabilities.

Secret Reserves :

Secret Reserves are reserves which are not known to the members of the company. When secret reserves exit, the financial position of the company is better than what appears from the balance sheet. In some businesses, for example banks, the existence of secret reserves is necessary. Such businesses, depending upon public confidence, cannot afford to show a loss in any trading period. Secret reserves enable them to show a profit even when there is a loss. Secret reserves are created by the simple method of showing profit at a figure much lower than the actual.

Illustration 20 :

A company maintains its Reserve for discounts on Sundry Creditors @ 4%. On Ist April, 1995 Reserve for discounts on Sundry Creditors stood in the books for Rs. 9,500. On 31st March, 1996 and 31st March, 1997 Sundry Creditors (before adjustment of Discount received) amounted to Rs. 1,30,000 and Rs. 1,80,000 respectively.

Discounts received                                          Rs.

1995-96                    4,500

1996-97                  12,000

Show the Reserved for Discount on Sundry Creditors Account for 1995-96 and 1996-97.

Solution :
Dr.	Reserve for Discount A/c on Sundry Creditors		Cr.
Particulars	Rs.	Particulars	Rs.
01.4.95 To Balance b/d	9,500	31.3.96 By Discount Received	4,500
31.3.96 To Profit & Loss A/c		31.3.96 By Balance c/d (4% on
— transferred	20	Rs. 1,25,500)	5,020
	9,520		9,520
01.4.96 To Balance b/d	5,020	31.3.97 By Discount Received	12,000
31.3.97 To Profit & Loss A/c — trfd.   13,700		31.3.97 By Balance c/d	6,720
	18,720		18,720

Illustration 21 :

R. Sing, a trader makes provision for doubtful debts at the end of each year against specific debtors. On 31st March, 1997 the following debtors’ balances were considered doubtful and provided for B Rs. 3,000, C Rs. 800, D Rs. 500.

Following are the particulars for the year ended 31st March, 1998 :

(i)   Bad Debts  00, S - Rs. 1,200, N - Rs. 1,000;

(iii)      Bad Debts considered doubtful at the end of the year : G - Rs. 1,600, H - Rs. 1,800, K - Rs. 2,000.

Debts considered doubtful at the commencement of the year were either realised or written off as Bad Debts.

Write up the Bad Debts A/c and Provision for Doubtful Debts A/c for the year ended 31st March, 1998.

Solution :

R Singh

Dr.		Bad Debts Account		Cr.
	Particulars	Particulars		Rs.
	31.3.98	31.3.98
	To Sundry Debtors		By Provisions for
(2,400+500+500)		3,400	Bad Debts A/c	3,400
		3,400		3,400

Dr.		Provision For Bad Debts Account		Cr.
	Particulars	Rs.	Particulars	Rs.
	31.3.98		1.4.97
	To Bad Debts A/c	3,400	By Balance b/f (3,000+800+500)	4,300
	To Balance (1,600+1,800+2,000) 5,400		31.3.98
			By Bad & Doubtful Recovery A/c 3,600
			(1,400+1,200+1,000)
			By Profit & Loss A/c	900
		8,800		8,800

Note : Amount realised against bad debts previously written off should be credited to Provision for Bad & Doubtful Debts A/c.

Illustration 22 :

(a)        The following is the agewise analysis of customers dues not yet written off as bad as at the end of each of the 3 years ended 31st March, 2000:

	Over 3	Outstanding for		Less than
		Over 2	Over 1
	years	years upto	year upto	one year
		3 years	2 years
	Rs.	Rs.	Rs.	Rs.
31-3-1998	40,000	1,00,000	2,00,000	10,00,000
31-3-1999	50,000	1,20,000	2,25,000	12,00,000
31-3-2000	60,000	1,50,000	2,70,000	15,00,000

(b)       The business carried forward a “provision” for doubtful debts and a “reserve” for doubtful debts at the end of each year with reference to year end debtors :

Debts due	Provision	Reserve
Over 3 years	100%	Nil
Over 2 years less than 3 years	75%	25%
Over 1 year less than 2 years	50%	10%
Less than 1 year	4%	6%

(c)       The actual bad debts written off before arriving at the figures of debtors in (a) above during the year were :

	Rs.
1997-1998	50,000
1998-1999	75,000
1999-2000	1,00,000

You are asked to show for each of the 3 years ended 31-3-2000 accounts relating to

(i)       bad debts,

(ii)       provision for doubtful debts,

(iii)      reserve for doubtful debts.

You are informed that the balance on 31-3-1997 in “provision” for doubtful debts account is Rs. 60,000 and in ”reserve” for doubtful debts account is Rs. 1,00,000.

Show your working.

Solution :

Working

	31.3.97	31-3-98	31-3-99	31-3-2000
	Rs.	Rs.	Rs.	Rs.
Bad debts written off.	?	50000	75000	100000
Provision for doubtful debts :	60,000	40,000	50,000	60,000
at 100%
at 75%		75,000	90,000	1,12,500
at 50%		1,00,000	1,12,500	1,35,000
at 4%		40,000	48,000	60,000
Closing balance.	60,000	2,55,000	3,00,500	3,67,500
Reserve for doubtful debts:	1,00,000	25,000	30,000	37,500
at 25%
at 10%		20,000	22,500	27,000
at 6%		60,000	72,000	90,000
		1,05,000	1,24,500	1,24,500

			Bad Debts A/c.
			Dr.	Cr.	Balance
1997-98	To	Customers A/c.	Rs.	Rs.	Rs.	Dr.
Mar. 31			50,000		50,000
	By	Provision for bad debts	.	50,000	Nil.
			50,000	50,000
1998-99
Mar. 31	To	Customers A/c	75,000		75,000	Dr.
	By	Provision for bad debts.	.	75,000	Nil
			75,000	75,000
1999-2000
Mar. 31	To	Customers A/c	1,00,000		1,00,000
	By	Provisions for bad debts.	.	1,00,000	Nil.
			1,00,000	1,00,000
		Provision for Doubtful Debts
1997-98			Dr.	Cr.	Balance
Apr. 1	By	Balance b/fd	Rs.	Rs.	Rs.	Cr.
				60,000	60,000
Mar. 31	To	Bad Debts.	50,000		10,000	”
	By	Profit and loss A/c.		2,45,000	2,55,000	”
	To	Balance c/fd	2,55,000	.
1998-99			3,05,000	3,05,000
Apr. 1	By	Balance b/fd		2,55,000	2,55,000	Cr.
Mar. 31	To	Bad debts	75,000		1,80,000	”
	By	Profit and loss A/c.		1,20,500	3,00,500	”
	To	Balance c/fd.	3,00,500	.
			3,75,500	3,75,500
1999-2000.
Apr. 1	By	Balance b/fd		3,00,500	3,00,500	Cr.
Mar. 31	To	Bad debts	1,00,000		2,00,500	”
	By	Profit and loss A/c		1,67,000	3,67,500	”
	To	Balance c/fd.	3,67,500	.
			4,67500	4,67,500

		Reserve for doubtful debts
1997-98			Dr.	Cr.	Balance
			Rs.	Rs.	Rs.
Apr. 1	By	Balance b/fd		1,00,000	1,00,000	Cr.
Mar. 31	”	Profit and loss appropriation		5,000	1,05,000	”
	To	Balance c/fd	1,05,000
			1,05,000	1,05,000
1998-99
Apr. 1	By	Balance b/fd		1,05,000	1,05,000	Cr.
Mar. 31	”	Profit and Loss appropriation		19,500	1,24,500	”
	To	Balance c/fd.	1,24,500	.
			1,24,500	1,24,500
1999-2000
Apr.1	By	Balance b/fd		1,24,500	1,24,500	Cr.
Mar. 31	”	Profit and loss appropriation.		30,000	1,54,500	”
	To	Balance c/fd.	1,54,500	.
			154,500	1,54,500

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