Question

Kam Excavating Co Limited has bought a JCB Machine for Rs 2 million as of 1

March 2018. The JCB was imported from China and the following additional

costs were incurred:

Import duties: Rs440,000

Installation cost: Rs60,000

Transportation cost in delivering the JCB on the company site: Rs10,000

As the business of the Company expanded, it bought another JCB machine on 1

June 2019 for Rs2.5 million inclusive of all import duties and other costs. On 30

September 2019, Kam Excavating Limited got an interesting proposal and sold

its first JCB Machine for Rs2.2 million.

Kam Excavating Ltd has adopted a 31 December as financial year end and has

decided on the following policies for its PPE:

1. The company uses the reducing method to depreciate both assets at the

rate of 10% per annum.

2. Depreciation is to be provided on a time basis according to the months of

use.

The useful life estimated for each of the JCB machine was assessed to be 10 years

for both JCBs and the scrap value is Rs100,000 for first JCB and Rs220,000 for

the second JCB.

Page 5 of 6

REQUIRED:

For the year ended 31 December 2019, prepare:

- The machinery account (4 marks)

- The accumulated depreciation of the machinery account (4 marks)

- The disposal of machinery account (4 marks)

- An extract of income statement (3 marks)

- An extract of balance sheet (3 marks)

Part B- 12 marks

REQUIRED:

1. Discuss how the matching principle applies to depreciation (2 marks)

2. Differentiate between capital expenditure and revenue expenditure with

2 examples of each (5 marks)

3. Give 3 reasons why we depreciate assets (3 marks)

4. Why is the reducing balance method preferred over the straight-line

method in some cases? 

Answer 1

1.

REDUCING BALANCE METHOD
Machinery Account
date	particulars	amt	date	particulars	amt
01.03.2018	To Bank	2510000	31.12.2018	by balance b/d	2510000
	2000000+440000+60000+10000
		2510000			2510000
01.01.2019	To balance c/d	2510000
01.06.2019	To bank	2500000	30.06.2019	by Disposal of machinery account	2510000
			31.12.2019	by balance b/d	2500000
		5010000			5010000
Accumulated depreciation account
date	particulars	amt	date	particulars	amt
31.12.2018	To balance b/d	209167	31.12.2018	By P&L Depreciation	209167
				(25,10,000*10%*10/12)
		209167			209167
30.06.2019	To Disposal of machinery account	324210	01.01.2019	by balance c/d	209167
	(209167+115042)		30.06.2019	By P&L Depreciation	115042
				(25,10,000-209167)*10/100*6/12
31.12.2018	To balance b/d	125000	31.12.2018	By P&L Depreciation	125000
				(25,00,000*10%*6/12)
		449210			449208
Disposal of machinery account
date	particulars	amt	date	particulars	amt
30.06.2019	To Machinery	2510000	30.06.2019	by accumalated dep	324210
30.06.2019	To profit on sale of machinery	14210	30.06.2019	By Bank ac	2200000
		2524210			2524210
Extracts
Profit and loss statement
date	particulars	amt	date	particulars	amt
2018	To depreciation	209167
2019	To depreciation	240042	2019	by profit on sale of machinery	14210
	(115042+125000)
Balance sheet
	particulars	amt		particulars	amt
2018			2018	Fixed assets	2510000
				less accumulated dep	-209167
					2300833
2019				Fixed assets	2500000
				less accumulated dep	-125000
					2375000

2. Time Basis

TIME BASIS
Machinery Account
date	particulars	amt	date	particulars	amt
01.03.2018	To Bank	2510000	31.12.2018	by balance b/d	2510000
	2000000+440000+60000+10000
		2510000			2510000
01.01.2019	To balance c/d	2510000
01.06.2019	To bank	2500000	30.06.2019	by Disposal of machinery account	2510000
			31.12.2019	by balance b/d	2500000
		5010000			5010000
Accumulated depreciation account
date	particulars	amt	date	particulars	amt
31.12.2018	To balance b/d	209167	31.12.2018	By P&L Depreciation	209167
				((25,10,000/10)*(10/12))
		209167			209167
30.06.2019	To Disposal of machinery account	334667	01.01.2019	by balance c/d	209167
	(209167+125500)		30.06.2019	By P&L Depreciation	125500
				(25,10,000/10)*6/12
31.12.2018	To balance b/d	125000	31.12.2018	By P&L Depreciation	125000
				(25,00,000/10)*(6/12)
		459667			459667
Disposal of machinery account
date	particulars	amt	date	particulars	amt
30.06.2019	To Machinery	2510000	30.06.2019	by accumalated dep	334666.7
30.06.2019	To profit on sale of machinery	24666.67	30.06.2019	By Bank ac	2200000
		2524210			2534667
Extracts
Profit and loss statement
date	particulars	amt	date	particulars	amt
2018	To depreciation	209167
2019	To depreciation	250500	2019	by profit on sale of machinery	24666.67
	(125500+125000)
Balance sheet
	particulars	amt		particulars	amt
2018			2018	Fixed assets	2510000
				less accumulated dep	-209167
					2300833
2019				Fixed assets	2500000
				less accumulated dep	-125000
					2375000

3. Discuss how the matching principle applies to depreciation

>We charge depreciation because most of the long-lived assets used in a business have 1) a significant cost, and 2) they will be useful only for a limited number of years. The matching principle (a basic underlying accounting principle) requires that the actual cost of these assets be allocated to the accounting periods in which the company will benefit from their use.

>Fixed asset value are charged to expense gradually via depreciation, and over a long period of time with respect to usage in the business, thus the depreciation expened accoring with usage with repect to reveune as it, here thus the matching take place

>in brief depreciation based on production is best example for matching concept

4. Diffference between Capital expenditure and revenue expenditure

	Capital expenditure			revenue expenditure
meaning	>Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time	>Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense
Timing	>Capital expenditures are charged to expense gradually via depreciation, and over a long period of time.	>Revenue expenditures are charged to expense in the current period, or shortly thereafter.
Consumption	>A capital expenditure is assumed to be consumed over the useful life of the related fixed asset.	>A revenue expenditure is assumed to be consumed within a very short period of time.
Size	>A more questionable difference is that capital expenditures tend to involve larger monetary amounts than revenue expenditures. This is because an expenditure is only classified as a capital expenditure if it exceeds a certain threshold value; if not, it is automatically designated as a revenue expenditure. However, certain quite large expenditures can still be classified as revenue expenditures, as long they are directly associated with revenue transactions or are period costs.
examples	Fixed assets			stationery
	Investments			travelling charges

5. Give 3 reasons why we depreciate assets

1	Wear and Tear of the Asset
2	Obsolescence
3	Need to Comply with Accounting Standards

6. Why is the reducing balance method preferred over the straight-line method in some cases?

WDV is preferred to be applied for fixed assets that have a higher degree of wear and tear or obsolescence i.e.: whose benefits are higher in the initial years than in subsequent years. For e.g.: in case of plant and machinery or technology related assets, WDV method may be more appropriate