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1. Define depreciation. Distinguish it from

(a) Depletion (b) Amortization
2. Why it is necessary to calculate depreciation? Discuss various factors,
which are considered for calculating depreciation.
3. What causes depreciation? Discuss the reasons.
4. What are the methods to calculate Depreciation? Discuss briefly the
merits and limitations of these methods.
II. Answer the following questions in one sentence.
1. What is depreciation?
Answer: Defined as reduction in value/cost of asset in systematic
Manner over period until it reaches salvage value.
2. What are the different causes of depreciation?
Answer: Wear and Tear; as over a period if asset is utilized it will
be damaged and repair may be needed.
3. What are the features of depreciation?
Answer: 3.1 Net Book value will decrease for asset.
3.2 Includes loss of value due to usage,
obsolescence.
3.3 Continuing Process.
3.4 Must be deducted before calculation taxable
profits, as this is an expired cost.
For E.g. If profit is 50000 INR and depreciation is 10000 INR
then taxable profit is 50000 – 10000 = 40000 INR.
3.5 Does not include any actual cash flows.
4. Why depreciation is charged to an asset?
Answer: As per Accounting Standards, it is a good practice to show
the capital expense every period i.e. period wise. Thus, profits will
be evenly shared in each period.
5. How does physical wear and tear result in depreciation?
Answer: Physical Wear/Tear tend to worn out the Asset decreasing
its productivity over period. Thus, market value decrease for the asset.
6. Why is depreciation charged by business, which makes losses?
Answer: If I hide Depreciation for showing higher profits even if
organization is in loss, I may end up paying Tax too. Which will in fact
reduce my margin for profit. It will be better to show depreciation and
claim tax benefit.
7. Why is depreciation charged even in the year of loss?
Answer: Depreciation process does not depend on Profit/Loss, it is
mandatory to charge depreciation as expense on Asset is distributed
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across life.
8. What do you mean by exhaustion of an asset?
Answer: When useful life for asset is zero or Asset is fully
depreciated.
9. In which case depletion of assets takes place?
Answer: Just like depreciation, depletion is accounting concept
popularly utilized for tangible objects like Mineral Gas, Timber etc.
where wear/tear for asset is not there. In these cases the followinf
formula is used:
Depletion= (cost- salvage)*Actual Resource/Expected Resource
10. What do you mean by obsolescence?
Answer: When new model for asset procured/installed earlier is
released the previous asset market value decreases. This is
Obsolescence.
11. What is the main cause of depreciation in case of intangible assets?
Answer:
12. Is depreciation charging compulsory or voluntary as per the
Companies Act, 1956?
Answer:
13. Why fixed instalment method is also called as straight-line method?
Answer: As name suggests the depreciation amount is same each
period so it is called fixed installation/straight line.
14. How is cost of an asset determined?
Answer:
15. What is scrap value?
Answer: Also known as residual/salvage value. The value means
below which depreciation cannot be applied or in simpler terms assets
useful life is over.
16. Give equation for calculating depreciation under straight-line
method.
Answer: Dep per annum= cost-salvage/useful life;
17. Give equation for calculating depreciation under reducing balance
method.
Answer: Dep per annum= (NBV- Salvage)*rate;
18. What is prospective change in depreciation method?
Answer: Prospective Change means the effect of accounting
estimate and new policy is from current date and in future entry.
19. What is retrospective change in depreciation method?
Answer: It means change in accounting policy such that it was
present from starting.
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20. Give journal entry for adjusting profit made due to change in
method of depreciation.
Answer: It can only be achieved by reducing rate of Dep
retrospectively.
Expense (CR)
Accumulated Dep (Dr)
21. Is depreciation charged to reduce profits or to reduce the value of
asset during a financial year?
Answer: It is charged to reduce value of asset.
22. Which account is credited when a profit is made on sale of an
asset?
23. Where is depreciation transferred at the close of the year?
24. What do you understand by reducing balance method?
25. Which method of depreciation would you suggest for depreciating
a five year lease?
26. Explain purpose of providing depreciation.
27. What journal entry will be passed when expenses are paid for
installation of machinery?
28. How depreciation per year is fixed under fixed instalment method?
29. What is fixed instalment method of depreciation?
III. Choose the right answer for the following options.
1. The cost of self-constructed assets is taken as
(a) Prime cost + Indirect cost
(b) Construction cost + Interest cost on funds borrowed for
construction till all the inputs are acquired
(c) Construction cost + Interest cost on funds borrowed for
construction till the asset is ready for its intended use
(d) Construction costs + Interest on borrowing – Losses due to
strikes
(e) Total construction cost or market value whichever is less.
2. Which of the following enhances the earning capacity of an asset?
(a) Increase in working capacity of an asset
(b) Reduction in operating costs
(c) Replacing damaged parts of an asset
(d) Both (a) and (c) above
(e) (a), (b), and (c) above

3. Assets bought for non-monetary consideration can recorded at

(a) Their fair value
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(b) The book value of the asset given up

(c) Market value of shares (if exchanged for shares)
(d) All of the above
(e) Both (a) and (b) above
Answer questions 4 to 6 based on the following information:
Z Ltd purchased a machine for `3,00,000 on 1 April 2006. Depreciation
is provided on straight-line method. The estimated life of machine is 9
years and the scrap value is `30,000.
4. The amount of depreciation charged is
(a) `33,333 (b) `30,000
(c) `27,000 (d) `35,000
(e) `41,111
5. The rate of depreciation in the above case is
(a) 10% (b) 9%
(c) 15% (d) 8%
(e) 7%
6. If the asset is disposed of on 31 March 2012 for `2,00,000 the
profit/loss in such case is
(a) `40,000 (profit) (b) `40,000 (loss)
(c) `70,000 (profit) (d) `70,000 (loss)
(e) `30,000 (profit)
7. An asset was purchased for `10,000 on which depreciation was
provided @ 5% on SLM method, the WDV of the asset at the end of two
years is
(a) `7,500 (b) `8,000
(c) `8,500 (d) `9,000
(e) `9,500
8. Star Ltd purchased a machine for `10,000 on 1 April 2011.
Depreciation is provided @ 10% on written down value method. The
depreciation provided on the machine in financial year 2012–13 is
(a) `750 (b) `900
(c) `1,000 (d) `1,900
(e) `2,000
9. The written down value of the machine as on 31 March 2012 is (based
on the information given in question 8)
(a) `10,000 (b) `9,000
(c) `8,100 (d) `8,000
(e) `7,000
10. If the machine (given in the previous question) is sold for `8,000 on 1
December 2012 the profit/loss on sale of machine is
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(a) Profit of `400 (b) Loss of `400

(c) Profit of `1,000 (d) Loss of `2,000
(e) Profit of `2,000
11. When a fixed asset is obtained as a gift, the account to be credited is
(a) Asset A/c (b) Goodwill A/c
(c) Capital reserve A/c (d) Donor’s A/c
(e) General reserve A/c
12. As per the accounting standard AS-10, fixed assets that have been
retired from active use and held for disposal should be stated in
balance sheet at
(a) Realizable value
(b) Net book value
(c) Original cost
(d) Higher of net book value or realizable value
(e) Lower of net book value or realizable value
13. In the books of ACB Ltd, the machinery A/c shows a debit balance of
`50,000 as on 1 April 2011. The machinery was sold on 30 September
2011 for `30,000. If the company charges depreciation @ 20% p.a. on
diminishing balance method, the final accounts of the company at the
end of the year will show as
(a) Depreciation of `20,000
(b) Depreciation of `10,000
(c) Depreciation of `5,000
(d) Depreciation of `5,000 and loss on sale of machinery `15,000
(e) Loss on sale of machinery `20,000
14. Property and plant and equipment are conventionally presented in
the balance sheet at
(a) Replacement cost less accumulated depreciation
(b) Historical cost less salvage value
(c) Historical cost less depreciation portion thereof
(d) Original cost adjusted for general price level changes
(e) Market value less depreciation.
15. ABC Ltd purchased a machine for `5,00,000 on 1 October 2010.
The salvage value of the machine after 6 years is `80,000. The
straight-line rate of depreciation on the machine is %
(a) 16.66 (b) 16.00
(c) 15.00 (d) 14.00
(e) 12.00
16. If a machine costing `18,000 is sold after 2 years for `16,000 and
the depreciation rate is 15% per annum on straight-line method, then
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the profit or loss from the sale of machine is

(a) `3,400 (loss) (b) `2,995 (loss)
(c) `2,995 (profit) (d) `3,000 (profit)
(e) `3,400 (profit)
17. A machine was purchased for `50,000. The machine was
depreciated @ 20% p.a. on WDV basis for 3 years. If the machine is
sold at a value of `25,000, the profit and loss account will be
debited/credited by
(a) `25,000 (credit) (b) `1,000 (credit)
(c) `1,000 (debit) (d) `600 (credit)
(e) `600 (debit)
18. The book value of a machine is `4,000. Two years later the book
value is expected to be `2,000. The rate of depreciation according to
diminishing balance method is
(a) 50% (b) 33.33%
(c) 29.29% (d) 25%
(e) 20%
19. The main objective of providing depreciation is to
(a) Calculate the true profit
(b) Show the true financial position in the balance sheet
(c) Reduce tax burden
(d) Provide funds for replacement of fixed assets
(e) Comply with the legal requirements
20. Depreciation is a process of
(a) Valuation (b) Valuation and allocation
(c) Allocation (d) Appropriation
(e) Segregation
21. Chauhan Company acquired equipment for `40,000 with an
expected useful life of five years and of `2,000 expected residual value.
Straight-line method of depreciation was used. The equipment was
sold at the end of fourth year for `15,000. The gain or loss on sale will
be
(a) `7,400 (gain) (b) `5,400 (gain)
(c) `7,600 (gain) (d) `13,000 (loss)
(e) `5,400 (loss)
22. An asset was purchased for `20,000 on which depreciation is
provided @ 10% on reducing balance method. The WDV of the asset at
the end of 4 years is
(a) `12,000 (b) `12,400
(c) `13,122 (d) `14,400
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(e) `16,200

23. An asset was purchased for `10,000 on which depreciation is

provided @ 10% on reducing balance method. The WDV of the asset at
the end of 4 years is
(a) `6,000 (b) `7,200
(c) `6,561 (d) `8,100
(e) `6,200
24. On 1 October 2010, XYZ Ltd purchased an asset at a cost of `50,000.
The company provides depreciation at 12% p.a. on written down value
method. On 31 December 2011, the asset was sold for `45,000. For
the financial year ended 31 March 2012, the profit on sale of the asset
is recorded at
(a) `6,280 (b) `5,230
(c) `5,000 (d) `3,640
(e) `2,230
25. Dito Ltd sold a depreciable asset for `30,000 payable in cash. The
accumulated depreciation amounted to `50,000 and a loss of `10,000
was recognized on sale. The original cost of the asset was
(a) `90,000 (b) `70,000
(c) `60,000 (d) `40,000
(e) `30,000
26. A fixed asset has a life of 4 years. If it is depreciated by the WDV
method, its book value at the end of 4 years is 24% of its original cost.
Hence the rate of depreciation applied is (choose nearest answer).
(a) 24% (b) 28%
(c) 30% (d) 32%
(e) 34%
27. Another name for the straight-line method is
(a) The equal instalment method
(b) The reducing balance method
(c) The diminishing balance method
(d) The revaluation method
28. Generally accepted practice require that
(a) Assets are shown at cost
(b) Assets are shown at cost less total depreciation to date
(c) Assets are shown at cost less previous year’s depreciation
(d) Assets are shown at current net value
29. Which of the following is/are the advantages of the equal instalment
method?
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(i) Easy to understand; calculations simple

(ii) Decreasing depreciation charges cancel out increasing repairs
(iii) No recalculation necessary when further asset are purchased
(a) (i), (ii), and (iii) (b) (i) and (ii) only
(c) (i) only (d) (iii) only
30. Which of the following is/are the disadvantages of the reducing
balance method?
(i) Percentage figure to be deducted annually is too difficult to calculate
(ii) The charge against the profit and loss account increases over the
years
(iii) If a further asset is purchased, the amount now required to be
written off needs to be recalculated
(a) (i), (ii), and (iii) (b) (i) and (ii) only
(c) (i) only (d) (ii) only
31. Depreciation results from
(i) Wear and tear
(ii) Obsolescence
(iii) The passage of time
(a) (i), (ii), and (iii) (b) (i) and (ii) only
(c) (i) only (d) (iii) only
32. Using the equal instalment method for depreciation, the relevant
formula is
(a) Annual Charge Against Profits = Original Cost – Residual Value/No. of
Years of Active Life
(b) Annual Charge Against Profits = Number of Years of Active
Life/Original Cost – Residual Value
(c) Annual Charge Against Profits = Original Cost – Residual
Value/Estimated No. of Remaining Years
(d) Annual Charge Against Profits = Estimated Number of
Remaining Years/Original Cost – Residual Value
33. The book of prime entry necessary to introduce the annual
depreciation is
(a) The cash book (b) The purchase book
(c) The ledger (d) The journal
34. Consider a piece of machinery costing `30,000 with an estimated
life of 10 years. At the end of this time it can be sold for `3,000. Using
the equal instalment method the annual charge against profits would
be
(a) `3,000 (b) `3,300
(c) `2,700 (d) None of above
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35. At cost a firm’s assets were valued at `18,000. Three years later
their book value is `10,000. The depreciation charge for the three
years is
(a) `12,000 (b) `10,000
(c) `8,000 (d) `6,000
36. An asset was purchased for `12,500 and, under reducing balance
method 20% of the reducing value of the asset is written off each year.
What is the value of the asset at the end of three years?
(a) `8,000 (b) `7,500
(c) `6,400 (d) `5,000
37. A machine is purchased for `200. To achieve a residual value of
`128 at the end of the second year (assuming the depreciation is
calculated at the end of the year), the percentage of depreciation using
the reducing balance method must be
(a) 12% (b) 36%
(c) 20% (d) 12%
38. Which of the following is/are methods of depreciation?
(i) Straight-line
(ii) Reducing balance
(iii) Revaluation
(a) (i), (ii), and (iii) (b) (i) and (ii) only
(c) (i) only (d) (iii) only
39. The book value of a machine is `2,000. Two years later the book
value is `1,000. The straight-line percentage depreciation is
(a) 50% (b) 33.33%
(c) 25% (d) 20%
IV. Fill in the blanks.
1. Under system, amount of depreciation changes every year.
2. Depreciation amount remains under fixed instalment method.
3. The amount of depreciation goes on decreasing every year under
the method of depreciation.
4. At the end of every year the balance of depreciation account is
transferred to account.
5. Under the system of depreciation, the amount of depreciation does
not change from year to year.
6. Under method, the cost of asset cannot be reduced to zero.
7. Amount spent on installation of machinery is a expenditure.
8. Depreciation = Cost of an Asset less /Estimated Life of an Asset.
9. Under the system the amount of depreciation remains constant
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every year.
10. Depreciation = Cost of the Asset – Estimated Scrap Value.

11. Wages paid for installation of machinery should be debited to

account.
12. Under method, depreciation is calculated on written down value.
13. Balance of depreciation A/c is transferred to A/c.
14. Under the straight-line method, the asset is reduced to its by the end
of its estimated economical life.
15. Gradual and permanent decrease in the value of asset is known as .
16. Depreciation is charged on asset.
V. Giving reasons to state whether the following statements are True
or False.
1. Profit cannot be computed properly unless depreciation is provided.
2. It is not necessary to depreciate a building if it is not in use.
3. Depreciation increases the value of asset as well as increases the
profit of the year.
4. Repairs to machinery are revenue expenditure.
5. Installation charges incurred on machinery are capital expenditure.
6. Under reducing balance method, value of fixed asset is reduced to
zero.
7. Depreciation is not charged by loss making business.
8. Freehold land never depreciates.
9. Under fixed instalment method, amount of depreciation remains
constant.
10. The profit or loss on sale of fixed asset can be ascertained only after
the depreciation is calculated.
VI. Write the word/term/phrase which can substitute each of the
following statements.
1. The method of depreciation in which depreciation amount remains
constant every year.
2. The method of depreciation in which depreciation amount charged to
an asset decrease every year.
3. Formula used for calculating depreciation under straight-line method.
4. The type of asset on which depreciation is charged and written off.
5. Fixed asset which never depreciates.
6. Two reasons due to which fixed assets depreciate.
7. Price expected to be fetched on disposal of an asset at the end of its
useful life.
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8. The process due to which the value of an asset decreases every year.
9. The account to which balance remaining under depreciation account
is transferred at the end of each financial year.
10. The method of depreciation under which the fixed asset is reduced to
zero in the books at the end of its expected useful life.
11. The gradual and permanent decrease in the value of fixed asset due
to any cause.
VII. Match the following pairs.
A B
1. Residual value (a) Depreciable
2. Fixed assets (b) SLM to WDV or
vice versa
3. Fixed instalment(c) Expected
method realizable value of
used assets at end
of its life
4. Cost of assets (d) Total useful
working period of
asset
5. Reducing balance(e) Depreciation
method charged on original
cost
6. Current assets (f) Purchase price
plus installation
charges
7. Depreciation (g) Reduction in the
value of asset due
to its use
8. Life period (h) Liquid/quick
assets
9. Change of(i) Depreciation
depreciation method charged on opening
balance of asset
10. Machinery (j) Tangible assets

VIII. Solve the following problems.

1. On 1 January 2010, K.K. Ltd purchased machinery for `58,000 and
spent `2,000 on its installation. On 1 July 2010, an additional
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machine costing `20,000 was purchased. On 1 July 2012, the

machine purchased on 1 January 2010 was sold for `28,600 and on
the same date new machinery was purchased at a cost of `40,000.
Show the machinery account for the first four calendar years
according to WDV method, taking the rate of depreciation at 10% p.a.
2. On 1 January 2010, machinery was purchased for `80,000. On 1
January 2011, additions costing `40,000 were made to the machinery.
On 31 March 2012, machinery costing `12,000 purchased on 1
January 2011 was sold for `11,000 and on 30 June 2012, machinery
purchased on 1 January 2010 costing `32,000 was sold for `26,700.
On 1 October 2012, addition costings `20,000 were made to the
machinery. Depreciation was provided at 10% p.a. on diminishing
balance method. Show the machinery account for three years from 31
December 2010 to 2012.
3. On 1 July 2008, Gourav Ltd purchased second-hand machinery for
`20,000 and spent `3,000 on re-conditioning and installing it. On 1
January 2009, the firm purchased machinery worth `12,000. On 30
June 2010, the machinery purchased on 1 January 2009 was sold for
`8,000. On 1 July 2010, fresh machinery was purchased on hire
purchase basis, and payment for the machinery was to be made as
follows:
1 July 2010 `5,000
30 June 2011 `6,000
30 June 2012 `5,500
Payments in 2011 and 2012 include interest of `1,000 and `500
respectively.
The company writes off depreciation @ 10% p.a. on original cost. The
accounts are closed every year on 31 March. Show the machinery
account for three years ending 31 March 2011.
4. Abhi closes his books on 30 June every year. He operates his
factory with two machines purchased from Bina under an
arrangement by which at the end of three years Bina allows him 20%
p.a. of the cost price as exchange for a new model.
He provides depreciation at the rate of 30% p.a. of original cost for
each of the first two years and 20% p.a. for the third year. The
following payments to Bina have been recorded since Abhi commenced
business on 1 July 2009:
On 1 July 2009 Purchase of machine A `2,000
On 1 July 2010 Purchase of machine B `3,000
On 30 June 2012 On purchase of machine C
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in exchange of machine A `3,600

On 31 December 2012, Abhi purchased from Bina a new model
(machine D) which would do the work of two machines. The cost was
`5,000 and Bina allowed `3,000 for machine B and C in part exchange.
You are required to prepare plant account for four years up to 31
December 2012 in the books of Abhi, open a separate account for
depreciation provision, and show the balances on these accounts
carried down as on 30 June every year and on 31 December 2012. In
addition, prepare a plant disposal account by clearly differentiating
between depreciation and loss on sale.
5. A company provides depreciation on plant and machinery at 20% p.a.
on reducing balance. On 1 April 2011, the balance in the plant and
machinery account was `5,00,000. It was discovered in 2011–12 that
(a) `25,000 being repairs to machinery incurred on 30 June 2009 had
been capitalized.
(b) `50,000 being the cost of a generator purchased on 1 October 2008
had been written off to stores.
Directors want to correct the mistakes while finalizing the accounts for
the year ended 31 March 2012.
A plant that costs `40,000 on 30 September 2010 was scrapped and
replaced with a more sophisticated one on 31 December 2011 by
spending `60,000. Scrap was realized at `10,000.
Prepare the plant and machinery account as it would appear on 31
March 2012, after providing depreciation for the year.
6. XZ Ltd purchased a machine for `1,00,000 on 1 April 2009 and
incurred `20,000 as installation charges. It was estimated that the
machinery will have a scrap value of `10,000 at the end of its useful
life which is 4 years. It was decided to institute a sinking fund for the
purpose of accumulating sufficient funds to replace the machinery at
the end of its useful life and to invest in some readily convertible
securities yielding 12% interest per annum. Reference to the table
shows that `1 per annum at 12% compound interest amounts to
`4.779 in 4 years. Investments are to be made in the multiples of `10
only. On 31 March 2013, the investments were realized at `80,000 and
scrap value of machinery realized only `8,000. A new machine costing
`80,000 was purchased on 1 April 2013. Prepare the necessary ledger
accounts in the books of XZ Ltd for 4 years.
7. A firm purchased machinery on lease for a period of five years for
`1,00,000 on 1 January 2009. It was decided to write off the lease by
annuity method by presuming interest at 5% p.a. The annuity table
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shows that the annual amount necessary to write off `1 at 5% p.a. is

`0.230967. You are required to prepare the machinery account for five
years and show the net amount to be charged to profit and loss account
for these five years.

Cases

Conceptual Application Case

Fixed Assets An automobile manufacturer bought six heavy stamping
machines at a price of `16,250 each. When they were delivered, the
purchaser paid freight charges of `4,200 and handling fees of `1,200.
Four employees, each earning `10 an hour, worked for three 40-hour
weeks setting up and testing the machines. Special wiring and other
materials applicable to the new machines cost `600.
Questions
How much of these costs should be capitalized as costs of these
machines?
Business Application Case
1. Dairy Farm Rahul Mehta owns a small dairy farm in Ahmedabad. He
purchased the farm for `2,40,000 in 2004. `1,00,000 was paid for the
land and `1,40,000 for the farm buildings. In 2009, the farm was
revalued. According to a local firm of estate valuers, the land was
worth `1,60,000 and the buildings were valued at `2,20,000. When the
farm was purchased, the straight-line method was used to depreciate
the buildings. A residual value of zero was assumed and the useful life
of the buildings was expected to be 25 years. It was decided that no
depreciation charge would be made on the land. Two years ago Rahul
also owned a tractor which he bought for `30,000. The reducing
balance method is used to calculate depreciation on this asset.
Questions
1. Calculate the annual depreciation charge for the farm buildings: (1)
between 2004 and 2008 (2) between 2009 and 2013.
2. Draw up a table to show the historical cost/revaluation, annual
depreciation charge, and the asset book value of the buildings
from 2004 to 2013.
3. Why are fixed assets such as land and property sometimes revalued?
4. Calculate the current net book value of the tractor. Write off the
tractor at a rate of 30% each year.
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5. Suggest two other assets that the farm will depreciate in its accounts.
2. Rajini Sinha (This case study discusses the impact on financial
position on account of change in accounting policy). Rajini Sinha is
not happy with her depreciation policy for fixtures and fittings and her
estate car. She feels that the fixtures and fittings (purchased on 1
April 2010 for `40,000) will not last the ten years as originally
planned, because a new look to her shop may become essential within
a shorter period of time. However, she considers that the original
items will still have a good resale value when she decides to replace
them. Also, concerning the estate car (valued at `18,000 on 1 April
2010), she feels that a period of five years is the time after which she
will need to replace the car, but that it will have some resale value.
Make theoretical calculations that will show the figures that would
have resulted if the following depreciation policies had been followed
from the beginning, in April 2013.
Fixtures and fittings: 20% per annum on a reducing balance basis
(instead of 10% on a straight-line basis)
Estate car: 20% per annum on a reducing balance basis (instead of
20% on a straight-line basis)
Questions
1. Prepare a table that compares the original (straight-line) and
suggested (reducing balance) calculations for depreciation of
Rajini’s fixtures and fittings, and (separately) her estate car, for the
three separate years ending 31 March 2013. The table should
show the depreciation charge against profits for each year and also
the reduced balance or written down value at the end of each year.
2. Calculate how much more (or less) depreciation the suggested
revised policy would have been charged against profit in the first
two years, the years ending 31 March 2011 and 2012.
3. Calculate the revised figure for Rajini’s opening capital on 1
April 2013 (which at present is `2,01,790), assuming the revised
policy had been applied from April 2011.
4. Calculate the revised figure for net profit for the year ended 31
March 2014 (`20,240), again assuming the revised policy had been
applied from April 2011.
5. Calculate the revised figure for owner’s worth (`1,82,910 as on 1
April 2013) at 31 March 2014, again assuming the revised policy
had been applied from April 2011.
6. Which depreciation policy would you have recommended to
Rajini in April 2011?
This sheet is Prepared by -- SS

7. What would you advise now on the accounts for the third year ended
31 March 2014, assuming that the accounts for the first two years
cannot now be altered?

3. Book Publishers Book publishers spend substantial sums to edit

textbook manuscripts and to prepare the photographic plates from
which the books themselves are printed. Textbook A is expected to
remain in print for about five years. Up-to-date competing textbooks
will be published each year by other publishing companies. The longer
a textbook has been in print, the more out of date it is likely to be,
making it more and more difficult to compete with the newer
textbooks in the market.
Questions
1. What depreciation method should be adopted for textbook A?
2. What effects would your choice have on the publisher’s financial
statements?
4. janta Mills Ltd In January 2000, Ajanta Mills Ltd bought and placed
in service a new paper machine costing `50,000. Its estimated useful
life was 20 years, with no major overhauls planned for that period.
Depreciation was to be calculated on a straight-line basis, with a zero
estimated salvage value.
In December 2003, certain improvements were added to this machine
at a cost of `6,000. Twelve years later, in the fall of 2015, the machine
was thoroughly overhauled and rebuilt at a cost of `12,000. It was
estimated that the overhaul would extend the machine’s useful life by
five years, or until the end of 2014. Depreciation charges for 2015
were unaffected by the overhaul.
Questions
1. Calculate the machine’s book value at the end of 2003, after
depreciation for the year was recorded but before the
improvements were accounted for.
2. Show the journal entry requirement to record the improvements
added in December 2003.
3. Compute depreciation for 2004 on a straight-line basis.
4. Show the journal entry required to record the overhauling of the
machine in the fall of 2015.
5. Compute depreciation for 2016 on a straight-line basis.