Question

On 1st April, 2016, Shivam Enterprise purchased a second-hand machinery for Rs 52,000 and spent Rs 2,000 on cartage, Rs 3,000 on unloading, Rs 2,000 on installation and Rs 1,000 as brokerage of the middle man. It was estimated that the machinery will have a scrap value of Rs 6,000 at the end of its useful life, which is 10 years. On 31st December 2016, repairs and renewals amounted to Rs 2,500 were paid. On 1st October, 2018, this machine was sold for Rs 30,600 and an amount of Rs 600 was paid as commission to an agent. Calculate the amount of annual depreciation and rate of depreciation. Also prepare the Machinery Account for first 3 years, assuming that firm follows financial year for accounting.

Answer 1

Correct Answer - [Annual Depreciation- Rs 5,400; Rate of Depreciation - 9% p.a; Loss on Sale of Machinery- Rs 16,500.]
`"Annual Depreciation "=("Cost - Estimated Scrap Value")/("Estimated Useful Life")`
`=("Rs 60,000 - Rs 6,000")/(10)="Rs 5,400."`
Cartage of Rs 2,000, unloading of Rs 3,000, installation charge of Rs 2,000 and brokerage of Rs 1,000 paid will be added to the cost of machinery. The amount spent on repairs and renewaIs is of revenue nature and not of capital nature. So, it is not debite to Machinery Account.