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What is Depreciation?
A company has purchased a machine for 10 lakhs and used it for 2 years.
Now it wants to sell the machine for 10 lakhs. Can it do so?
Definitely not, because the machine is used one. It can find a lot of buyers if
the price is less than 10 lakhs. So, there is a loss in the value of asset by usage,
passage of time, wear and tear etc,
As per the principles of accounting, this loss has to be provided by debiting
P&L A/C. This provision for loss is known as “Depreciation”
So, Depreciation has to be provided (i.e. provision for loss) on “Depreciable assets”
Means that the company is Means that the company is charging a higher rate,
charging a lower rate, it is allowed to charge a higher rate than Schedule
it is not allowed to charge a lower XIV, provided the BOD concluded after taking
rate than Schedule XIV into account commercial and technical factors,
since the financial statements must reflect a true
and fair view.
Treatment in case of
Due to
O/S depreciable amount of asset
Exchange variation Revaluation should be allocated over the
revised useful life of an asset
2. Samantha Ltd has an asset purchased 3 years ago for 9,70,000. The
residual value of the asset was estimated to be 10,000 after an estimated
useful life of 8 years. The company charges straight line method of
depreciation. Due to change in technology, the company estimates that the
asset will become obsolete in another 3 years time from now. How should
depreciation be treated in view of revision in useful life?
3. Chandrika Ltd has an equipment purchased 2 years ago for 3,80,000. The
residual value of asset was estimated to be 20,000. The total useful life of
the asset when purchased was 12 years. The company charges SLM. Due to
price adjustment, the cost of asset is now increased by 30,000. What is the
treatment for increase in the historical cost? Advise.
5. BB ltd. depreciated its plant and machinery under two different methods as
under:
Year 1 2 3 4 5
SLM 7.8 7.8 7.8 7.8 7.8
WDV 21.38 15.8 11.68 8.64 6.38
What would be the amount of resultant surplus/deficiency, if the company
decides to switch over from WDV method to SLM for first four years? Also
state how you will treat the same in accounts?
6. B Ltd. Purchased certain plant and machinery for Rs.50 lakhs. 20% of the
cost net of CENVAT credit is the subsidy component to be realized from a
State Government for establishing industry in a backward district. Cost
includes excise Rs. 8 lakhs against which CENVAT credit can be claimed.
Compute depreciable amount.
The relevant IAS/IFRS and its material departure from AS – 6 is as follows:
IAS 16 – Property, plant and Equipment
A change in the depreciation method is treated as change in accounting
estimate and the effect should be given prospectively as per IAS – 16. But
according to AS – 6, change in method of depreciation is accounted as
change in accounting policy and accounted retrospectively.
As per IAS 16, component approach of depreciation is applicable. An entity
is required to depreciate separately the significant parts of property, plant
and equipment if they have different useful lives. As per AS 6, Component
approach is permitted upon satisfying certain conditions.