Chapter # 10 Depreciation

Principles of Accounting – B.Com Part – I

Sameer Hussain

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Depreciation

Chapter # 10

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WHAT THE EXAMINER USUALLY ASK?

Computation of cost of fixed asset. Computation of depreciation expense under:

o Straight Line Method. o Diminishing Balance Method. o Units Production Method. o Working Hours Method. o Sum of the Year’s Digit Method.

Disposal: o Computation of gain or loss on sale. o Computation of gain or loss on exchange. o Computation of loss on discard.

Journal Entries: o Journal entry to record the purchase of machine. o Adjusting and closing entry for depreciation expense. o Entry to record sale of fixed asset. o Entry to record exchange of fixed asset. o Entry to record discard of fixed asset.

Extra – ordinary repairs. Revised depreciation. T – Accounts:

o Cost of fixed asset. o Depreciation expense. o Allowance for depreciation.

Partial Balance Sheet.

Depreciation

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Chapter # 10

DEPRECIATION DEPRECIATION

A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.

amortization

The process followed in allocating the cost of long-lived assets to the periods in which their benefits are derived. Examples are amortized expenses on intangible assets such as goodwill. Amortization is same as the depreciation process. Depreciation is used for tangible fixed assets while amortization is normally used for intangible fixed assets.

depletion

Systematic and rational allocating of the cost of a natural resource over the period of exploitation or the using up of an asset, especially a mineral asset is known as depletion. For example, a quarry is depleted by the extraction of stone.

Capital expenditure

The expenditure incurred for acquiring a fixed asset or which results in increasing the earning capacity of the business is known as capital expenditures. The benefits of capital expenditures are generally availed in several accounting years.

Revenue expenditure

An expenditure incurred in the course of regular business a transaction of a concern is availed in the same accounting year is known as revenue expenditure.

Differences between capital expenditure and revenue

expenditure

BASIS OF DIFFERENCE CAPITAL EXPENDITURE REVENUE EXPENDITURE 1. Purpose It is incurred for the

purchase of fixed assets. It is incurred for the maintenance of fixed assets.

2. Earning Capacity It increases the earning capacity of the business.

It does not increase the earning capacity of the business.

3. Periodicity of Benefit

Its benefits are spread over a number of years.

Its benefit is only for one accounting period.

4. Placement in Financial Statements

It is an item of balance sheet and is shown as an asset.

It is an item of trading and profit and loss account and is shown on the debit side of either of the two.

Salvage value

The net residual value of an asset at the end of its useful life, when it is no longer suitable for its original use is called salvage value. It is also known as scrap value, residual value or resale value.

Depreciation

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Computation of Cost of machine

List price of fixed asset XXX Less: Trade discount (XXX) Invoice price XXX Less: Cash discount (XXX) Net cash price XXX Add: Additional Cost Incurred: Sales tax XXX Freight – in XXX Insurance in transit XXX Import duty / custom duty XXX Foundation charges XXX Installation charges XXX Testing charges XXX Total additional cost incurred (XXX) Total cost of machine XXX

Entry to record purchase of fixed asset

Fixed asset DR. (with net cash price) Cash CR. (with net cash price) (To record the purchase of fixed asset) ---------------------------------------------------------------------------------------------------------------------- Fixed asset DR. (with total additional cost incurred) Cash CR. (with total additional cost incurred) (To record the additional cost incurred) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 1: (Cost of Machine)

1991 Regular & Private – UOK The Sunshine Company Ltd. purchases a machine on account on June 10, 1991 at a list price of Rs.80,000 subject to a Trade Discount of 10%. The Credit terms were 2/10, n/45. Sales Tax was payable at 5% on the net Cash Price. The Company also made the following payments: For Freight Rs.5,000. For Transit Insurance Rs.712. For Installation Rs.3,200. For 3 Year Fire Insurance Rs.900. During the unloading a certain part of the machine was damaged and was replaced at cost of Rs.2,500. REQUIRED Calculate the total cost of machine.

SOLUTION # 1:

Computation of Cost of Machine: List price 80,000 Less: Trade discount (80,000 x 10%) (8,000) Invoice price 72,000 Less: Cash discount (72,000 x 2%) (1,440) Net cash price 70,560 Add: Additional Cost Incurred: Sales tax (70,560 x 5%) 3,528 Freight 5,000

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Insurance in transit 712 Installation charges 3,200 Total additional cost incurred 12,440 Total cost of machine 83,000

Book value

The value at which an asset appears in the books of organization (usually as at the date of the last balance sheet) is called book value. This is the purchase cost or latest revaluation less any depreciation applied since purchase or revaluation. Book value = Cost – Allowance for depreciation Depreciable cost

The cost of fixed asset which is depreciated during its whole working life is called depreciable cost. Depreciable cost = Cost – Salvage value

Methods of depreciation

1) Straight line method

A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year. The annual depreciation is calculated by subtracting the salvage value of the asset from the purchase price, and then dividing this number by the estimated useful life of the asset. It is also called fixed installment method because the amount of depreciation remains fixed during the whole life of asset. Usually this method is used for those fixed assets whose life does not affect it its production.

Annual depreciation = Cost – Salvage value

Estimated life in years

2) Diminishing balance method

A common depreciation-calculation system that involves applying the depreciation rate against the non-depreciated balance is known as diminishing balance method. Instead of spreading the cost of the asset evenly over its life, this system expenses the asset at a constant rate, which results in declining depreciation charges each successive period. It is also known as declining balance method or reducing balance method. Usually this method is used for those fixed assets whose life can effect on its production. Annual depreciation = Cost / Book value x Rate (%)

3) Sum of the year’S digit method

Sum of the year’s digit method is a system for calculating the annual depreciation expense for a capital asset. The calculation involves identifying the number of years over which the asset will be depreciated and summing all of the numbers while counting back to one. This becomes the denominator in the ratio used to determine annual depreciation. The numerator is the number of years remaining in the life of the asset. Annual depreciation = Depreciable cost x Yearly Fraction

4) Unit production method

Accounting method where a provision for depreciation is computed at a fixed rate per unit of product, based on an estimate of the total number of units the property will produce during its service life. This method is useful only when the total number of units of production can be accurately estimated.

Rate per unit = Cost – Salvage value

Estimated life in units

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Annual depreciation = Units produced x Rate per unit

5) Working hours method

Accounting method where a provision for depreciation is computed at a fixed rate per hour of machine, based on an estimate of the total number of hours the machine will work during its service life. This method is useful only when the total number of hours can be accurately estimated.

Rate per hour = Cost – Salvage value

Estimated life in hours Annual depreciation = Hours worked x Rate per hour

Entry to record the depreciation for the period

Depreciation expense DR. (with amount of depreciation expense) Allowance for depreciation CR. (with amount of depreciation expense) (To record the depreciation expense for the period) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 2: (Depreciation by Straight Line Method)

1998 Regular – UOK Ahmed Company purchased a machine for Rs.110,000 on January 1, 1995 and estimated its life to be 10 years and scrap value Rs.10,000. REQUIRED

(i) Calculate depreciation on machine for the years ended June 30, 1995 and 1996, using Straight Line Depreciation Method.

(ii) Give adjusting entries for the years ended June 30, 1995 and 1996.

SOLUTION # 2:

Computation of Depreciation Expense by Straight Line Method: Annual depreciation = Cost – Scrap value Estimated life in years Annual depreciation = 110,000 – 10,000 10 Annual depreciation = 10,000 Depreciation expense for the 30 June 1995 = 10,000 x 6/12 = 5,000 Depreciation expense for the 30 June 1996 = 10,000

AHMED COMPANY GENERAL JOURNAL

Date Particulars P/R Debit Credit 30 June Depreciation expense 5,000 1995 Allowance for depreciation 5,000 (To record the depreciation expense) 30 June Depreciation expense 10,000 1996 Allowance for depreciation 10,000 (To record the depreciation expense)

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ILLUSTRATION # 3: (Depreciation by Diminishing Balance Method)

2005 Regular – UOK Office equipment was purchased by Naeem & Co. for Rs.80,000 on July 1, 2003. The residual value was estimated at 10% of its purchase price and estimated its life to be 5 years. REQUIRED

(i) Calculate the amount of depreciation for the year ended Dec. 31, 2003 & Dec. 31, 2004 by 20% Diminishing Balance Method.

(ii) Give necessary entries in General Journal including adjusting and closing entries for the year ended Dec. 31, 2003 & 04.

(iii) Prepare the allowance for depreciation account & post the above adjusting entries for 2003 & 2004. Balance the a/c.

SOLUTION # 3:

Computation of Depreciation Expense by Diminishing Balance Method: Annual depreciation = Cost/Book value x Rate (%) Book value = Cost – Allowance for depreciation Year Cost/Book

Value Rate Depreciation

Expense Allowance for Depreciation

Book Value

2003 80,000 20% 16,000x6/12=8,000 8,000 80,000–8,000=72,000 2004 72,000 20% 14,400 8,000+14,400=22,400 80,000–22,400=57,600

ASIM CO.

GENERAL JOURNAL Date Particulars P/R Debit Credit

1 July Machine 80,000 2003 Cash 80,000 (To record the purchase of machine) 31 Dec Depreciation expense 8,000 2003 Allowance for depreciation 8,000 (To record the depreciation expense) 31 Dec Expense and revenue summary 8,000 2003 Depreciation expense 8,000 (To close the depreciation expense account) 31 Dec Depreciation expense 14,400 2004 Allowance for depreciation 14,400 (To record the depreciation expense) 31 Dec Expense and revenue summary 14,400 2004 Depreciation expense 14,400 (To close the depreciation expense account)

Allowance for Depreciation 31 Dec 03 c/d balance 8,000 31 Dec 03 Depreciation exp. 8,000 8,000 8,000

1 Jan 04 b/d balance 8,000 31 Dec 04 c/d balance 22,400 31 Dec 04 Depreciation exp. 14,400 22,400 22,400

1 Jan 05 b/d balance 22,400

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ILLUSTRATION # 4: (Depreciation by Sum of the Year’s Digit Method)

1997 Regular – UOK On 1st April 1994, Tariq Tex. Co. bought five machines at a list price of Rs.40,000/= each with a trade discount of 5%. The terms of payment were 2/10, n/30. The company made the payment with in discount period. Additional expenses incurred and paid in cash were:- (1) Freight and Octroi Rs.10,400. (2) Paid interest on the money borrowed from the bank for the purchase of machine Rs.200. (3) Installation and testing charges Rs.23,200. (4) Insurance-in-transit Rs.15,700. (5) Sales tax 8% of invoice price. (6) Some parts damaged during installation and get repaired for Rs.4,300. It is estimated that these machines will have a useful life of 15 years with a salvage value of Rs.10,700. The company uses “SUM OF THE YEARS’ DIGIT METHOD” of providing depreciation. REQUIRED

(i) Compute the cost of machinery. (ii) Pass the journal entries to record the purchase of machinery & expenses. (iii) Also compute and journalize the adjusting entries of depreciation expense for 1st three

years if accounting year of the company ends on 31st March.

SOLUTION # 4:

Computation of Cost of Machine: List price of machine (40,000 x 5) 200,000 Less: Trade discount (200,000 x 5%) (10,000) Invoice price 190,000 Less: Cash discount (190,000 x 2%) (3,800) Net cash price 186,200 Add: Additional Cost Incurred: Sales tax (190,000 x 8%) 15,200 Freight and Octroi 10,400 Installation and testing charges 23,200 Insurance in transit 15,700 Total additional cost incurred 64,500 Total cost of machine 250,700

TARIQ TEX. CO.

GENERAL JOURNAL Date Particulars P/R Debit Credit

1 Machine 201,400 Cash 201,400 (To record the purchase of machine) 2 Machine 49,300 Cash 49,300 (To record the additional cost on machine) 3 Interest expense 200 Cash 200 (To record the interest paid on loan) 2 Repairs expense 4,300 Cash 4,300 (To record the repairs expense paid for machine)

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Computation of Depreciation Expense by Sum of the Year’s Digit Method: Annual depreciation = Cost – Salvage value (Depreciable cost) x Yearly fraction Fraction = n (n + 1) 2 Fraction = 15 (15 +1) 2 Fraction = 120 Depreciable cost = Cost – Salvage value Depreciable cost = 250,700 – 10,700 = 240,000

Year Depreciable Cost Yearly

Fraction Depreciation

Expense Allowance for Depreciation

Book Value

1995 240,000 15/120 30,000 30,000 220,700 1996 240,000 14/120 28,000 58,000 192,700 1997 240,000 13/120 26,000 84,000 166,700

TARIQ TEX. CO.

GENERAL JOURNAL Date Particulars P/R Debit Credit

31 Dec Depreciation expense 30,000 1995 Allowance for depreciation – Machine 30,000 (To adjust the depreciation expense) 31 Dec Depreciation expense 28,000 1996 Allowance for depreciation – Machine 28,00 (To adjust the depreciation expense) 31 Dec Depreciation expense 26,000 1997 Allowance for depreciation – Machine 26,000 (To adjust the depreciation expense)

ILLUSTRATION # 5: (Depreciation by Units Production Method)

Purchased a machine on 8 August 2008 for Rs.880,000 having salvage value of Rs.80,000. The estimated useful life of machine was 400,000 units. Company uses Units Production Method to charge depreciation. Accounting period ends on 31 December each year. Required: Compute the depreciation if:

100,000 units produce in the year 2008. 200,000 units produce in the year 2009.

SOLUTION # 5: Computation of Depreciation Expense by Units Production Method:

Rate per unit = Cost – Salvage value

Estimated life in units

Rate per unit = 880,000 – 80,000

400,000 Rate per unit = Rs.2 per unit Depreciation expense for the 31 December 2008 = 100,000 x 2 = 200,000 Depreciation expense for the 31 December 2009 = 200,000 x 2 = 400,000

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ILLUSTRATION # 6: (Depreciation by Working Hours Method)

Purchased a machine on 23 September 2010 for Rs.880,000 having salvage value of Rs.80,000. The estimated useful life of machine was 100,000 hours. Company uses Working Hours Method to charge depreciation. Accounting period ends on 31 December each year. Required: Compute the depreciation if:

4,000 hours worked in the year 2010. 6,000 hours worked in the year 2011.

SOLUTION # 6: Computation of Depreciation Expense by Working Hours Method:

Rate per hour = Cost – Salvage value

Estimated life in hours

Rate per hour = 880,000 – 80,000

100,000 Rate per hour = Rs.8 per unit Depreciation expense for the 31 December 2010 = 4,000 x 8 = 32,000 Depreciation expense for the 31 December 2011 = 6,000 x 8 = 48,000

Sale of fixed asset

A fixed asset can be sold after or before the end of its useful life. If the asset is sold more than its book value, it is said to be gain on sale but if the asset is sold less than its book value, it is said to be loss on sale.

Computation of gain or loss on sale

Cost of fixed asset XXX Less: Allowance for depreciation up to date (XXX) Net book value XXX Less: Sold for (XXX) Gain/Loss on sale XXX/(XXX)

Entry to record the sale of fixed asset

In Case of Gain: Cash DR. (with amount received for sale of fixed asset) Allowance for depreciation DR. (with accumulated depreciation up to date of sale) Gain on sale CR. (with gain on sale) Fixed asset CR. (with original cost) (To record the sale of fixed asset on gain) ---------------------------------------------------------------------------------------------------------------------- In Case of Loss: Cash DR. (with amount received for sale of fixed asset) Allowance for depreciation DR. (with accumulated depreciation up to date of sale) Loss on sale DR. (with loss on sale) Fixed asset CR. (with original cost) (To record the sale of fixed asset on loss) ----------------------------------------------------------------------------------------------------------------------

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ILLUSTRATION # 7: (Gain or Loss on Sale)

1997 Regular – UOK Pass a compound journal entry if an old delivery van originally bought for Rs.80,000 (5 years’ ago) having an accumulated depreciation of Rs.54,000 was disposed for cash Rs.45,000 on 31st October, 1997.

SOLUTION # 7: Computation of Gain or Loss on Sale: Cost of delivery van 80,000 Less: allowance for depreciation upto date (54,000) Book value 26,000 Less: Sold for (45,000) Gain on sale 19,000

M/S. ___________

GENERAL JOURNAL Date Particulars P/R Debit Credit

31 Oct Cash 45,000 1997 Allowance for depreciation – Delivery van 54,000 Gain on sale 19,000 Delivery van 80,000 (To record the sale of delivery van on gain)

Exchange of fixed asset

Fixed asset can be exchanged with other fixed asset. If the value of trade-in-allowance is more than the book value of fixed asset (old), it is said to be gain on exchange but if the value of trade-in-allowance is less than the book value of fixed asset (old), it is said to be loss on exchange. Trade-in-allowance is the value of old fixed asset which is agreed at market for sale.

Computation of gain or loss on exchange

Cost of fixed asset (old) XXX Less: Allowance for depreciation up to date (XXX) Net book value XXX Less: Trade-in-allowance (XXX) Gain/Loss on exchange XXX/(XXX)

Computation of cash payment

Cost of fixed asset (new) XXX Less: Trade-in-allowance (XXX) Cash payment XXX

Entry to record the exchange of fixed asset

In Case of Gain: Fixed asset (new) DR. (with cost of new fixed asset) Allowance for depreciation DR. (with accumulated depreciation up to date) Gain on exchange CR. (with gain on sale) Cash CR. (with cash payment for exchange) Fixed asset (old) CR. (with original cost) (To record the exchange of fixed asset on gain) ----------------------------------------------------------------------------------------------------------------------

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In Case of Loss: Fixed asset (new) DR. (with cost of new fixed asset) Allowance for depreciation DR. (with accumulated depreciation up to date) Loss on exchange DR. (with loss on sale) Cash CR. (with cash payment for exchange) Fixed asset (old) CR. (with original cost) (To record the exchange of fixed asset on loss) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 8: (Gain or Loss on Exchange)

1988 Regular & Private – UOK An equipment costing Rs.5,000 is traded in with a new equipment having a listed price of Rs.8,000. The trade in allowance for the old equipment is agreed at Rs.700 and balance is paid in cash. The allowance for depreciation for the old amounted to Rs.4,100. REQUIRED Supported by proper computations give entries to record the trade in.

SOLUTION # 8:

Computation of Gain or Loss on Exchange: Cost of equipment (old) 5,000 Less: Allowance for depreciation up to date (4,100) Book value 900 Less: Trade-in-allowance (700) Loss on exchange 200

Computation of Cash Payment: Cost of equipment (new) 8,000 Less: Trade-in-allowance (700) Cash payment 7,300

M/S. ___________

GENERAL JOURNAL Date Particulars P/R Debit Credit

1 Equipment (New) 8,000 Allowance for depreciation – Equipment 4,100 Loss on exchange 200 Equipment (Old) 5,000 Cash 7,300 (To record the exchange of equipment on loss)

Discard

Fixed asset can be retired instead of sale or exchange. If the fixed asset is retired before the end of its estimated useful life, it is said to be loss on discard.

Computation of loss on Discard

Cost of fixed asset XXX Less: Allowance for depreciation up to date (XXX) Loss on discard XXX

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Entry to record the loss on discard

Allowance for depreciation DR. (with accumulated depreciation up to date) Loss on discard DR. (with loss on discard) Fixed asset CR. (with original cost) (To record the loss on discard) ----------------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 9: (Loss on Discard)

Company discarded a machine having cost of Rs.80,000 and allowance for depreciation upto date of discard was Rs.73,000. REQUIRED Record the discard of machine.

SOLUTION # 9:

Computation of Loss on Discard: Cost of machine 80,000 Less: Allowance for depreciation up to date (73,000) Loss on discard 7,000

M/S. ___________

GENERAL JOURNAL Date Particulars P/R Debit Credit

1 Allowance for depreciation – Machine 73,000 Loss on discard 7,000 Machine 80,000 (To record the discard of machine)

Revised depreciation

When estimated life of fixed asset is changed or salvage value is changed or any capital expenditure (extra ordinary repair) incurred during the period on the fixed asset, then revised depreciation is calculated.

Computation of Revised depreciation by straight line

method

Annual depreciation = Cost – Allowance for depreciation + Extra ordinary

repair – New salvage value Remaining life / Revised life of fixed asset

ILLUSTRATION # 10: (Revised Depreciation – Extra Ordinary Repair)

2001 Regular & Private – UOK On January 5, 2000 Laghari Company paid Rs.18,000 for extra-ordinary repair of an equipment costing Rs.100,000 and having accumulated depreciation of Rs.45,000. This equipment was estimated to have useful life of 4 years, from the date of repair and a salvage value of Rs.9,000. On June 22, 2001 the equipment was sold for Rs.36,000 cash. Laghari Company follows calendar year as its accounting period. REQUIRED

(i) Give general journal entry to record extra-ordinary repairs. (ii) Determine depreciation per year after extra-ordinary repairs by Straight Line Method. (iii) Show the equipment and its accumulated depreciation on a partial balance sheet on

December 31, 2000. (iv) Give journal entries to record the sale of the equipment.

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SOLUTION # 10:

LAGHARI COMPANY GENERAL JOURNAL

Date Particulars P/R Debit Credit 5 Jan Equipment 18,000 2000 Cash 18,000 (To record the extra-ordinary repairs paid) Computation of Depreciation Expense by Straight Line Method: Annual depreciation = Cost + Extra ordinary repairs – Allowance for depreciation–Salvage value Revised life / Remaining life in years Annual depreciation = 100,000 + 18,000 – 45,000 – 9,000 4 Annual depreciation = 16,000 Depreciation expense for the period 31 December 2000 = 16,000 Depreciation expense for the period 22 June 2001 = 16,000 x 6/12 = 8,000

LAGHARI COMPANY BALANCE SHEET

AS ON 31 DECEMBER 2000 Assets Equities

Equipment 118,000 Less: Allowance for depreciation (61,000) 57,000 Computation of Gain or Loss on Sale: Cost of equipment 118,000 Less: allowance for depreciation upto date (69,000) Book value 49,000 Less: Sold for (36,000) Loss on sale (13,000)

LAGHARI COMPANY GENERAL JOURNAL

Date Particulars P/R Debit Credit 22 June Cash 36,000 2001 Accumulated depreciation – Equipment 69,000 Loss on sale 13,000 Equipment 118,000 (To record the sale of equipment on loss)

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Practice questions

Question # 1: 1997 Private – UOK Distinguish the following as Capital or Revenue Expenditures:

(1) Annual maintenance of plant and equipment. (2) Purchase of office furniture for business use. (3) Three years insurance paid on equipment for fire risk. (4) Purchase of hard disk for a computer to increase its storage capacity. (5) Purchase a new battery for a 3 years old truck. (6) Depreciation of equipment charged for the year.

Question # 2: 2002 Regular & Private – UOK Distinguish between capital expenditures and revenue expenditures. Question # 3: 1998 Regular – UOK Explain the methods of depreciation based on acceleration principle. Question # 4: 1999 Regular & Private – UOK Define depreciation, amortization and depletion from the view point of accounting. Give one example of the assets which are subject to depreciation, amortization and depletion. Question # 5: 1992 Private – UOK AL-HABIB LTD. acquired a machine on July 01, 1989 by incurring the following expenditure on cash basis.

(a) Net Cash price of machine Rs.80,000. (b) Sales Tax on machine Rs.10,000. (c) Custom duty on machine Rs.20,000. (d) Property tax on machine Rs.20,000 for 6 months. (e) Machine was damage during installation and was repaired at a cost Rs.3,500. (f) Installation and testing cost Rs.6,000. (g) Machine was insured against risk of fire Rs.1,500 for six months. (h) Insurance in transit Rs.4,000. (i) Freight Rs.6,500.

REQUIRED (1) Prepare separate schedules of Capital Expenditures and Revenue Expenditures. (2) Give an entry to record acquisition of machine, and another entry to record revenue

expenditures by debiting general expenses (control). Question # 6: 2002 Regular & Private – UOK Fazil company purchased a machine on April 1, 2001 at a list price of Rs.60,000 with a trade discount at 5%. The credit terms were 2/10, n/30. The payment was made within discount period. The company incurred the following additional expenditure.

(1) 4% Sales tax on the cash price of machine. (2) Custom duty Rs.11,000. (3) Installation and testing cost Rs.13,000. (4) The machine was insured against fire and premium paid Rs.3,500. (5) Insurance in transit Rs.5,000. (6) Freight in Rs.2,500.

REQUIRED (1) Compute the cost of machine. (2) Compute the depreciable cost and the depreciation charge for the year ended 2001 and

2002, using Straight Line Method assuming that the machine was estimated to have an operating life of 10 years and a scrap value of Rs.2,780.

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(3) Give the necessary journal entries on Dec. 31, 2001. (4) Prepare a partial balance sheet showing the machine cost and its allowance for

depreciation as on Dec. 31, 2002. Question # 7: 2004 Regular – UOK Arsalan & Co. records the acquisition of Vehicles in the account titled as “Delivery Equipment”. Following are the details of vehicles purchased. Date of Purchase Type of Vehicles Cost January 1, 2001 Truck 500,000 July 1, 2001 Car 250,000 October 1, 2002 Van 300,000 It was decided to depreciate delivery equipment at 10% per annum on the Straight Line Method. REQUIRED

(a) Write up delivery equipment account, depreciation expense account and allowance for depreciation account for the year ended December 31, 2001, 2002 and 2003. Close and balance (as the case may be) the accounts at each year end. Show computations of each year’s depreciation charges.

(b) Prepare balance sheet (partial) on December 31, 2003 showing the relevant account. Question # 8: 2008 Regular – UOK Aneel Company purchased equipment for Rs.700,000. The estimated resale value at the end of its useful life is Rs.60,000. The company uses Straight Line Method for computing depreciation. The quarterly depreciation of the equipment is Rs.20,000. REQUIRED Compute total life in years of the equipment. Question # 9: 2011 Regular – BIEK Shamim Ltd. purchased a machine on February 28, 2007 at a price of Rs.400,000/-. Its residual value was estimated @ 20%. The life is to be estimated in 5 years, in units 32,000 and in hours 64,000. The company’s year ended December 31, each year. REQUIRED Determine the depreciation on machine for 2007, 2008 and 2009 under the following: (i) Working hours: (year 2007, 1,500 hours, year 2008 2,500 hours & year 2009, 2,000 hours). (ii) Production units: (year 2007, 7,500 units, year 2008, 8,500 units & year 2009, 6,700 units). Note: Present your data separately for each method in the following form:

Year Cost of Machine (Rs.) Depreciation (Rs.) Accumulated Depreciation (Rs.)

Book Value of Machine (Rs.)

2007 2008 2009

Question # 10: 2011 Regular – UOK Yasir & Co. provides the following information:

Rate Per Unit Cost Salvage Value Estimated Production Units Rs. Rs. Rs. 2 80,000 20,000 ? 4 100,000 ? 20,000 ? 150,000 30,000 30,000 3 ? 50,000 150,000

REQUIRED Compute the missing amounts from the above table.

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Question # 11: 1994 Regular & Private – UOK Salman Company records the cost of various types of Machines into an account “Machine”. Following is the detail of the machines purchased.

Date of Purchase Types of Machine Cost January 1, 1991 Machine – A Rs.5,000

July 1, 1991 Machine – B Rs.10,000 October 1, 1992 Machine – C Rs.30,000

Machines are depreciated at 10% per annum on the diminishing balance method yearly accounts are prepared on December 31. REQUIRED

(a) Prepare Machine account, Depreciation account and Allowance for Depreciation account for the year 1991, 1992 and 1993. Close and balance the accounts of each year. Show computations of each year’s depreciation charge.

(b) Show the Machine account and the related Allowance for depreciation account on the Balance Sheet as of December 31, 1993.

Question # 12: 2011 Private – UOK Asim Company purchased the following machines under one head i.e. Machinery: Machine Date of

Purchase Cost (Rs.) Residual Value Life/Rate Method

A June 30, 2008 500,000 20% of cost 20 years Straight Line B Nov. 1, 2009 400,000 Rs.80,000 15% Reducing Balance C July 4, 2010 300,000 Rs.20,000 70,000 hours Working Hours

Company year ends on December 31 each year. REQUIRED

(1) Prepare adjusting journal entries for 2008, 2009 and 2010 to record depreciation for machine. The company has operated Machine C 3,000 hours in 2010.

(2) Show allowance for depreciation account for Machinery for the year 2010. (3) Prepare a partial Balance Sheet on December 31, 2009.

Question # 13: 2012 Private – UOK Wazir Company purchased the following machines under one head i.e. Office equipment:

Machine Date of

Purchase Cost

Residual Value

Life/Rate Method

A 30-6-2009 Rs.500,000 20% of cost 20 years Straight Line B 01-11-2010 Rs.400,000 Rs.80,000 10 years Diminishing Balance

Method REQUIRED Prepare adjusting journal entries for 2009, 2010 and 2011 for all machines. Company year ends on December 31 each year. Co. has operated 3,000 hours. Question # 14: 1998 Regular – UOK ABC Company furnishes following balances on January 1, 1996:- Equipment cost Rs.150,000 (A/c balance). Allowance for depreciation Rs.50,000. The company uses sum of the year’s digits method. The equipment has no salvage value. REQUIRED

(i) Calculate depreciation for the 2nd year ended December 31st 1996. Assuming the equipment estimated to have an operating life of five years.

(ii) Set up allowance for depreciation account for equipment for the year ended December 31, 1996 and make posting, balance and rule off the account.

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Question # 15: 1995 Private – UOK A machine was acquired by Marvi Corporation at a cost of Rs.400,000 on September 30, 1992. Its useful life was estimated to be five years with residual salvage value of Rs.100,000. Marvi Corporation closes its accounts on December 31. REQUIRED Supported by computations, prepare partial balance sheets on December 31, 1994 under each of the following methods:

(a) Sum of the Year’s Digit Method. (b) Declining Balance Method at 30%. Question # 16:

2010 Regular – UOK

On March 31, 2007 Safeer Company purchased a machine at a cost of Rs.400,000, which was expected to be sold for Rs.40,000 after its estimated useful life of 4 years. Company follows calendar year as its accounting period. REQUIRED Compute annual depreciation expense from 2007 to 2010 under:

(i) Sum of the years’ digit method. (ii) 50% Diminishing Balance Method. Limit the accumulated depreciation to the amount of

depreciable cost. Question # 17: 2000 Regular & Private – UOK XY Company acquired a computer on July 1, 1998 at a cost of Rs.50,000/=, its operating life was estimated as 5 years with salvage value of Rs.5,000/=. The company’s accounting year ends on December 31. REQUIRED Calculate the depreciation cost & depreciation charge on the computer for the years ended December 1, 998 and 1999 under each of the following methods separately: (i) Straight Line Method (ii) Reducing Balance Method (iii) Sum of the Years Digit Method Question # 18: 1988 Regular & Private – UOK Zamindar Spray Company purchased a small plane for Rs.600,000. Calculate the annual depreciation for each of the next two year under each of the following methods:

(i) Straight Line at 20% (ii) Declining Balance at 40% (iii) Sum of year digits with estimated useful life of 5 years

Question # 19: 1995 Private – UOK An office equipment that cost Rs.10,000 and had a book value of Rs.2,000 is sold for cash Rs.3,000. REQUIRED Give journal entries to record disposal of equipment. Question # 20: 2005 Regular – UOK Khalil & Co. sold a computer for Rs.160,000 on January 1, 2004. The cost of computer Rs.200,000 and had an allowance for depreciation of Rs.38,000. The Co. uses Straight Line Method. REQUIRED Record the necessary transactions in General journal (Show computations). Question # 21: 1994 Regular & Private – UOK A Machine Costing Rs.50,000 was traded in with another new machine having a list price of Rs.60,000, receiving a trade-in-allowance of Rs.20,000. The book value of the old machine on the data of exchange was Rs.35,000. REQUIRED Give entries in the general journal to record the trade-in. Show Computation.

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Question # 22: 2012 Private – UOK Shah Company purchased machine at a cost of Rs.70,000 which has a book value of Rs.45,920 on September 30, 2011. REQUIRED Prepare journal entries to record the following independent cases:

a) The machine was exchanged with a new machine costing Rs.84,000 with trade in value Rs.46,900. (Gain/loss is not to be recognized).

b) The machine was sold for Rs.30,000 cash. Question # 23: 1996 Private – UOK During 1995 Agro Spray Company engages in the following transactions: January 1: The Company traded in its old computer system as a part of a new system. The

old computer had cost Rs.40,000 and accumulated depreciation of Rs.14,000. The new computer had a list price of Rs.64,000. The company was granted Rs.24,000 trade in allowance for the old computer system.

April. 2: The Company sold a building for Rs.255,000. The building cost Rs.335,000 and had an accumulated depreciation of Rs.135,000 (January 1, 1995). The company uses Straight Line Method of depreciation. The building was estimated to have a useful life of 20 years and salvage value of Rs.35,000.

June. 30: The company retired a machine: Cost of machine was Rs.10,000 and on this date allowance for depreciation was Rs.8,500. Salvage value was estimated at Rs.400.

REQUIRED Record each of the transactions listed above (Show all computations). Question # 24: 2005 Private – UOK During 2004 Fast Company engaged in the following transactions: Jan. 1: The Company traded in its old equipment which had a cost Rs.60,000 and whose

accumulated depreciation was Rs.20,000. The new equipment had a list price of Rs.84,000. The company was granted Rs.24,000 trade in allowance for the old equipment.

Apr. 2: The Company sold a building for Rs.255,000. The building cost Rs.335,000 and had an accumulated depreciation of Rs.135,000 (January 1, 2004). The company uses Straight Line Method of depreciation. The building was estimated to have a useful life of 20 years and salvage value of Rs.35,000.

June. 30: the company disposed of a fully depreciated machine which had a cost of Rs.15,000 with no salvage value.

REQUIRED Record the above transactions in journal. Question # 25: 1992 Private – UOK An equipment which cost Rs.25,000 had an estimated useful life of 5 years and a scrap value of Rs.5,000 was depreciated by straight line method for 3 years. At end of year 3 it was exchanged with a new equipment with a price of Rs.36,000. Trade in allowance was Rs.14,600. REQUIRED Give an entry to record exchange at cost basis. Show necessary computations. Question # 26: 1993 Private – UOK Following are the selected transaction for M.A. Company: January 02, 1990, Purchased office furniture on account Rs.35,000. Estimated life 5 years,

salvages value Rs.3,500. January 05, 1990, Paid installation and delivery charges on the office furniture Rs.700. January 10, 1990, Paid the January 02, account less 2% cash discount.

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December 31, 1990, Adjusting entry to record Straight-line depreciation on office furniture purchased in January.

December 31, 1991, Adjusting entry for depreciation on furniture purchased January 1990. December 31, 1992, Record depreciation on furniture. July 01, 1993, Sold the office furniture for cash Rs.14,000. REQUIRED

(1) Make Journal Entries to record the above events. (2) Assume that the furniture sold on July 01, 1993 for cash Rs.10,500. Make the entry to

record the sale. NOTE: Gain or Loss on sale of furniture is to be recognized for both. Question # 27: 1990 Regular & Private – UOK Chawla Co. purchased a Computer for Rs.250,000 on January 02, 1984. The computer was estimated to have a Salvage Value of Rs.10,000 and it was to be depreciated at 40% per annum. The company uses Diminishing Balance Method for Depreciation. The Accounting year of the Company ends on December 31, each year. REQUIRED Prepare Journal Entries to record the disposal of computer under each of the following conditions separately:

(a) The Computer is sold for cash Rs.12,000 on April 20, 1986. (b) The Computer is Trade in for a similar one on May 05, 1986. The Trade in allowance was

agreed at Rs.20,000. The cost of new computer was Rs.150,000. Question # 28: 1993 Regular – UOK Salman & Company purchased a computer on July 01, 1990 at a billed price of Rs.46,500 and paid on the same date cartage of Rs.2,500 and 3 year fire insurance of Rs.3,000. The Computer is expected to have an estimated life of 5 years and salvage value of Rs.4,000. REQUIRED

(1) Compute the cost and depreciable cost of computer and give the necessary journal entries to record the cost of computer.

(2) Compute the Depreciation Charge as on December 31, 1990 & 1991 & give the necessary journal entries on December 31, 1990 and 1991 to record depreciation charge.

(3) Give the necessary journal entry assuming that the Computer purchased above is traded in with another computer on April 01, 1992 having a billed price of Rs.55,000 receiving a trade in allowance of Rs.30,000. Gain or Loss is to be recognized.

Question # 29: 1995 Regular – UOK Habib & Co. purchased a machine on April 1, 1989 at a list price of Rs.60,000 with a trade discount @ 5%. The term payment were 2/10, n/30. The payment was made immediately in concession period including a 4% sales tax. The company also incurred the following expenses:

1) Installation and testing charges Rs.2,500. 2) Prepaid fire insurance for 2 years Rs.2,000. 3) Insurance in transit Rs.1,500. 4) Transportation charges Rs.2,000.

It is estimated that the machinery has a salvage value of Rs.9,094 at the end of its estimated service life of 10 years. The company uses Sum of the Year’s Digit Method for computing depreciation and the allowance method for recording depreciation. On July 1, 1995 the machine was traded with new machine priced at Rs.70,000 with a traded allowance for Rs.18,000 and the balance was paid in cash. REQUIRED

(1) Compute the cost of machine as on April 1, 1989. (2) Compute the loss or gain on exchange of machine on July 1, 1995. (3) Compute the balance amount of cash payable on exchange of machine.

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(4) Give the necessary dated journal entries to record the cost of machine and depreciation on December 31, 1989 to July 1, 1995.

(5) Give necessary journal entries in proper form to record the exchange of machine on July 1, 1995, when the loss or gain is not recognized.

Question # 30: 1997 Private – UOK On January 1, 1993, Ghalib Co. purchased an equipment for Rs.155,000. The equipment has an estimated life of 5 years and expected salvage value of Rs.5,000. The accounting year of the Co. ends on December 31, each year. REQUIRED Give the necessary computations and the general entries to record the disposal of equipment on December 31, 1995, under each of the following assumptions:-

(1) The equipment sold for cash and gain realized value Rs.35,000 (assuming that the Co. uses Straight Line Method).

(2) The equipment was traded-in at Rs.30,000 for new equipment that had a cash price of Rs.175,000 (assuming that the Co, uses Sum-of-the-Years’ Digit Method).

Question # 31: 1998 Private – UOK Afzal & Co. acquired a computer at a cost of Rs.160,000 as on January 1990. The computer was depreciated under Straight Line Method with the assumption of a five years life and no salvage value. After four years on January 1, 1994, the computer was traded in with a new model computer priced at Rs.200,000. The trade in allowance was for Rs.48,000. REQUIRED Record the exchange:

(i) Recognizing loss or gain and (ii) Without recognizing loss or gain Question # 32: 1999 Regular & Private – UOK On July 1, 1995 Noorani Company purchased a machine at s list price of Rs.400,000 subject to a trade discount of 5%. The company paid transportation charges Rs.15,000 and installation charges Rs.5,000. The machine had estimated life of 10 years and scrap value Rs.10,000. The company had been using Sum-of-the-year digit method for computing depreciation. The accounts of the company are closed on December 31, each year. On July 1, 1998, the machine was traded-in with a new one having a market value of Rs.300,000. The trade-in-allowance of the old machine was agreed at Rs.150,000 and balance was paid in cash. REQUIRED

(a) Compute the cost of machine and depreciable cost of machine. (b) Compute the depreciation charge for the years ended December 31, 1995, 1996, 1997

and July 1, 1998. (c) Prepare journal entries in proper form to record the purchase of machine, depreciation

from December 31, 1995 to July 1, 1998 and the exchange of machine (loss or gain is recognized) as on July 1, 1998.

Question # 33: 2000 Regular & Private – UOK Equipment which cost Rs.6,000/= had an estimated useful life of 6 years and estimated salvage value of Rs.600/= Straight Line depreciation was used. REQUIRED Prepare the journal entries to record the disposal of the equipment under each of the following assumptions:

(i) The equipment was sold for Rs.4,000/= cash after 2 years’ use. (ii) After three years’ use the equipment was sold for Rs.3,500/= cash. (iii) After 4 years’ use the equipment was traded in on a similar equipment with a fair

market value of Rs.8,000/= the trade in allowance was Rs.3,100.

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Question # 34: 2003 Regular & Private – UOK On April 2, 1999 the Global Company acquired an equipment, it has estimated useful life of 3 years with salvage value Rs.5,000. The following expenditures were incurred on it. (The accounting year ends on December 31).

(i) Billed price Rs.275,000. (ii) Freight charges Rs.2,000 and transit insurance Rs.3,000. (iii) Installation expense Rs.25,000. (iv) Three year fire insurance Rs.15,000.

REQUIRED (a) Compute the cost of equipment. (b) Give the journal entries from (i) to (iv) above. (c) Company uses Straight Lien Method. Compute the depreciation expenses and

accumulated depreciation for the whole life of the asset. (d) Assume that the equipment was traded in with another equipment, costing Rs.400,000

on Dec. 31, 2001. The trade in allowance was Rs.50,000 and balance to be paid in cash. Note: Gain or loss is not to be recognized. Give the entries and computation. Question # 35: 2004 Private – UOK On March 1, 2002 Baber & Co. purchased a machine for Rs.62,000 cash. The estimates scrap value was Rs.4,000 and the estimated life was 8 years. The company paid Rs.2,000 for the machine installation. The company closes its books annually on December 31, and computes depreciation by the Straight Line Method from the first day of the month in which the asset was acquired. After using the machine for four months, it was serviced and repaired on July 1, 2002 at a cost of Rs.3,000. The company sold the machine on October 1, 2004 for Rs.54,300 cash. REQUIRED Prepare journal entries in books of the company for all the transactions mentioned above including annual adjusting journal entries and entry for disposal of the machine. Question # 36: 2006 Private – UOK On January 1, 2001, Aasim Co. purchased a machine for Rs.135,000. Its life was estimated to be 5 years with scrap value of Rs.10,000. The company uses 40% Diminishing Balance Method. The accounting year ends on Dec. 31, each year. On June 30, 2004 the old machine was traded in with a new machine costing Rs.200,000. The trade in allowance was agreed at Rs.75,000 and the balance was paid in cash. REQUIRED

(i) Calculate the depreciation expense on machine for the years ended Dec. 31, 2001, 2002, 2003 and for 6 months of 2004 on June 30.

(ii) Calculate the gain or loss on exchange. (iii) Calculate the amount to be paid in cash on exchange. (iv) Give the necessary journal entries to record the depreciation expense on Dec. 31, 2001,

2002, 2003 & June 30, 2004 and the exchange of machine on June 30, 2004. Note: Gain or loss on exchange is not to be recognized in the entry for exchange. Question # 37: 2006 Regular – UOK On January 4, 2002 Mansoor and Company purchased a machine for Rs.125,000. The machine had an estimated service life of 6 years and an estimated residual value of Rs.5,000. The company uses Straight Line Method of depreciation and the accounts are closed on December 31, each tear. On January 5, 2004, the company exchanged the machine with a new machine having an invoice price of Rs.100,000. The new machine had an estimated scrap value of Rs.4,000 and it was to be depreciated at 20% per annum on Diminishing Balance Method.

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REQUIRED Prepare journal dated entries in proper form to record the purchase of machine, depreciation for the years ended 2002, 2003 & 2004, and the exchange of machine on January 5, 04. (Note: show computations in full). Question # 38: 2007 Private – UOK Danish Company purchases a machine on October 1, 2004 at a cost of Rs.132,000. Its useful life is estimated to be 15 years and scrap value is estimated at Rs.12,000. The company uses the Sum of the year’s Digit Method & the accounts are closed on Dec. 31, each year. On September 30, 2007, the company traded the machine for a new machine having an invoice price of Rs.150,000. The trade in allowance of the old machine on the date of exchange was Rs.50,000. REQUIRED Record the transactions for the year 2004 and 2007 in General Journal and show the necessary computation. Question # 39: 2008 Regular – UOK Qaiser Co. acquired a machine on Jan. 1 2005 at a cost Rs.500,000, its operating life was estimated to be 5 years with salvage value of Rs.50,000. The company closes its accounts on December 31 each year & uses sum of the year digits method for computing depreciation. On June 30, 2008, the machine was exchanged with a new similar machine having a price of Rs.700,000 & the trade in allowance of the old machine was agreed upon at 80% of its written down value / a book value. REQUIRED

(a) Calculate depreciation charge for the years ended Dec. 31, 2005, 2006, 2007 & upto June 30, 2008.

(b) Calculate balance to pay in cash. (c) Give an entry to record exchange of the machine.

Question # 40: 2009 Private – UOK Arshad & Co. acquired two machines on 3rd March, 2006 for Rs.440,000 each. The machines have estimated salvage value of Rs.40,000 each. Other information is as under:

Machines Life in Produces / Uses A 200,000 units 2006: 50,000 units, 2007: 100,000 units B 500,000 hours 2006: 70,000 hours, 2007: 80,000 hours

REQUIRED (i) Compute the depreciation of both the machines for the year ended Dec. 31, 2006 & 2007. (ii) After producing 150,000 units, the above machine – A was sold at a gain of Rs.10,000.

The machine – B was trade in with a new machine – C at Rs.20,000 less than its book value after 150,000 hours of use (loss is recognized).

(iii) Give the entries for the above disposal. Show necessary computation also. Question # 41: 2009 Regular – UOK Khalil Company uses 40% Reducing Balance Method for its office equipment costing Rs.300,000 acquired on Sept. 1, 2005. The salvage value is estimated at 1/6 of the cost. The company closes its books at December 31, each year. On January 1, 2008, the equipment was disposed of as under each of the following independent situations:

(i) Discard equipment without any proceeds. (ii) Sold at loss of Rs.45,000 for cash. (iii) Exchange with similar type of asset along with cash payment of Rs.16,200 having trade

in loss of Rs.5,000. REQUIRED

(i) Compute the book value of the asset at 1.1.08. (ii) Give the adjusting and closing entries at Dec. 31, 2007.

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(iii) Prepare journal entries for each type of disposal stated above. Question # 42: 2010 Private – UOK The following data relate to the three machines acquired by Mumtaz Company on Jan. 1, 2005:

Machine Cost Useful Life Scrap Value Depreciation Method A 340,000 6 years 40,000 Straight Line B 500,000 5 years 50,000 Sum of the Year’s Digits C 400,000 4 years 30,000 50% Diminishing Balance

REQUIRED (a) Compute the annual depreciation expense for the whole life of each machine and

present data in the following form: Year Machine A Machine B Machine C 2005 2006 2007 2008 2009 2010

(b) Record in General Journal the disposal of machines as per the following descriptions: (i) Machine C is traded in with Machine D priced Rs.480,000 receiving trade in allowance

equal to book value on December 31, 2006. (ii) Machine B is sold for cash Rs.190,000 on July 1, 2007. (iii) Machine A is retired without any consideration on September 30, 2009.

Question # 43: 2010 Regular – UOK The following are selected transactions performed by Sanaullah & Sons: Jan. 1. 2007 Purchased equipment at invoice price of Rs.200,000 on credit terms 2/10, n/30. Jan. 9. 2007 Paid the invoice of January 01. Dec. 31. 2010 Sold the equipment for cash Rs.40,000. The equipment had estimated life of six years and salvage value of Rs.14,000. Straight line method is used and accounts are closed on December 31. REQUIRED Prepare general journal entries to record:

(i) Purchase of equipment and payment of invoice. (ii) Sale of equipment supported by proper computations.

Question # 44: 2011 Regular – UOK On October 1, 2008, Qasim & Co. purchased a machine for Rs.600,000 on account. The machine had an estimated service life of 10 years and an estimated residual value of Rs.50,000. The company uses SUM-OF-THE-YEARS-DIGIT METHOD for depreciation. On September 30, 2010 the company traded the machine for a new machine having an invoice price of Rs.500,000. The trade-in-allowance for the old machine on the date of exchange was Rs.400,000. REQUIRED Prepare dated entries in General Journal to record purchase of machine, and the exchange of machine on Sept. 30, 2010. (Show all computations). Question # 45: 2012 Regular – UOK An extra ordinary repairs was made at a cost of Rs.65,000 to an equipment on October 1, 2010 and it extended its normal life from 5 years to 9 years. Payment was made in cash for the extra ordinary repairs. REQUIRED Record extraordinary repairs.

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Question # 46: 1992 Regular – UOK On April 01, 1988, Adil Company purchased an office Equipment at a cost of Rs.74,000. Its scrap value was estimated at Rs.10,000 and its useful life, 4 years. The company uses Straight Line Method of Depreciation. The company’s accounting year ends on December 31, each year. On January 05, 1991, the company paid Rs.22,000 cash for a major overhaul of the equipment. As a result of the overhaul, the Equipment has an expected useful life of 3 years from the data of the overhaul. Its scrape value remains the same, i.e. Rs.10,000/=. REQUIRED

(i) Prepare dated General Journal Entries for all transactions from 1988 to 1991. (ii) Prepare partial Balance Sheet on December 31, 1991.

Question # 47: 1996 Regular – UOK The following information is available from the book of Amjad & Company: On January 10, 1995, the company paid Rs.9,000 for replacing the plaster of walls of building. It is estimated that the new plaster will extent life of building from original life of 30 years to a total life of 36 years. Following are dome details of subsidiary ledgers:

(i) Cost of building Rs.100,000. (ii) Allowance for depreciation unto December 31, 1994 Rs.45,000. (iii) Age of building 20 years.

REQUIRED (a) Record extra ordinary repair in General Journal. (b) Determine depreciation on building for the year in which plaster was replaced, using

Straight Line Method and assuming no scrap value. (c) Prepare partial balance sheet on 31-12-1995.

Question # 48: 1996 Regular – UOK Hanif Company Ltd. purchased a truck on January 1, 1993 at a cost of Rs.275,000 having estimated life 25 years and salvage value Rs.25,000. The company uses Straight Line Method and accounting year ends on December 31, each year. On January 10, 1995 the company decided that estimated total life of truck should be 22 years instead of 25 years and salvage value should be Rs.35,000 instead of Rs.25,000. On July 1, 1196, the truck was traded in with a new truck having a listed price Rs.300,000. The trade-in-allowance of old truck was agreed at Rs.138,500 and balance is paid in cash. REQUIRED Computation and only entry to trade-in in the General Journal. Question # 49: 2007 Regular – UOK Huma Company purchased various types of assets. Details are as follows:

Assets Date of Purchase Cost Estimated Life/Rate

Method

Building Jan. 1, 2004 2,000,000 40 years Straight Line Machinery July 1, 2005 300,000 5% Diminishing Balance Equipment April 1, 2006 440,000 10 years Sum of the years digit On January 10, 2006 the company paid Rs.100,000 for replacing the plaster of walls of building. It is estimated that the new plaster will extend the life of building from an originally estimated 40 years to a total of 50 years. REQUIRED

(1) Compute the depreciation expense for the year 2004, 2005 and 206 (Show your computation).

(2) Record the extra ordinary repair of building in G. Journal. (3) Record depreciation expense for the year ended 31.12.2006. (4) Prepare a partial balance sheet as on December 31, 2006.

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Question # 50: 1991 Regular & Private – UOK Raza Brothers Ltd. purchased a machine for Rs.200,000 for cash on January 01, 1987. Its useful was estimated to be 10 years with Scrape Value of Rs.10,000 the Company uses STRAIGHT LINE METHOD for calculating Depreciation and the accounts are closed on December 31, each year. In December 1990 prior to recording Depreciation for 1990 the Company decided that the estimate of useful life of the machine should be 7 years instead of 10 years and the Scrape Value should be Rs.8,000 instead of Rs.10,000. On July 01, 1991 the machine was sold for Rs.105,000. REQUIRED Entries in the General Journal to record the above transactions from Jan. 01, 87 to July 01, 91. Question # 51: 2008 Private – UOK M/s. Saad Trading Co. acquired a business machine at a cost of Rs.270,000 on Jan. 1, 2003. The life of the machine was estimated at 5 years with a scrap value of Rs.25,000. The company uses sum of the years’ digit method for computing the depreciation. On January 8, 2006 extra ordinary repairs were made at a cost of Rs.42,500. As a result of which the normal life of the machine was extended to four years from January 2006. The company uses straight line method after the repairs. On October 1, 2008 the machine was sold for Rs.48,000. The company follows calendar year for closing its books of accounts. REQUIRED Prepare dated General Journal entries for all the transactions between 2003 and 2008. Question # 52: 1989 Regular & Private – UOK On January 01, 1980 Azam & Co. purchased a machine at a list price of Rs.50,000 with credit terms of 2/15, n/60. Sales tax was also payable at 4% on the net cash price. The Co. availed of the concession period of payment. The Company also incurred the following expenses:

(1) Insurance in Transit Rs.200 (2) Transportation Rs.1,500 (3) Installation Charges Rs.700 (4) 3 Year fire insurance Rs.900 (5) During installation work the machine was damaged and the repair cost was Rs.500

It was estimated that the machine is expected to life of 10 years. The company uses Straight Line Method of calculating depreciation and the allowances method for recording. The Company’s accounting year ends on December 31, Salvage Value of Rs.3,360. In December 1983 the company decided that estimated life of the machine should be changed from 10 years to 12 years and the estimated scrape value be changed from Rs.3,360 to Rs.2,360. The revised estimated of useful life was decided upon prior to recording depreciation for the period ended December 31, 1983. On July 01, 1985 the company decided to purchase a new machine and the machine described above was old for Rs.2,500 cash. REQUIRED

(a) Compute the Cost of Machine. (b) Prepare journal entries to record the purchase of the machine depreciation from 1980

to 1985 end the disposal of the machine. Question # 53: 2012 Regular – UOK A Textile Industry depreciates its machinery at 10% per annum on Straight Line basis. On April 1, 2010 the book value of machinery was Rs.840,000, its original cost was Rs.1,2000,000. On July 1, 2010 a new machine was purchased for Rs.25,000. On December 31, 2010 an old machine having written down value of Rs.40,000 on April 1, 2010 (original cost Rs.60,000) was sold for Rs.30,000. REQUIRED Give all necessary entries in the General Journal assuming year ended on March 31, 2011. (Show computations).