Depreciation Question 1

QUESTION 1 – Depreciation (CAF1 S17)

The following balances pertaining to fixed assets have been extracted from the trial balance of
Star Traders for the year ended 31 December 2016:
Rupees
Fixed assets – cost 25,000,000
Accumulated depreciation 6,250,000
Depreciation expense 1,250,000
Gain on disposal of fixed assets 58,000

Depreciation on fixed assets is charged from the month of addition to the month prior to disposal
using reducing balance method at 20% per annum.

Depreciation expense for the current year has been correctly calculated and recorded except for
the following:
(i) Physical verification of fixed assets carried out on 31 December 2016, revealed the
following matters:
 Two laptops purchased on 1 July 2015 at a cost of Rs. 245,000 were withdrawn by
the proprietor on 1 May 2016 for his personal use.

 Equipment costing Rs. 800,000 purchased on 1 January 2014 was damaged in rain
in December 2016 and was scrapped.

 A machine costing Rs. 75,000 is not in the list of fixed assets, but has been in the
use of sales department since 1 March 2016. On investigation it was found that the
machine was transferred from stock-in-trade but no adjustment was made in the
books.

(ii) Installation of an assembly plant was completed on 1 December 2016. Installation charges
amounting to Rs. 240,000 have not yet been recorded in the books due to non-receipt of
the invoice.

(iii) An invoice of Rs. 683,000 for a machine purchased on 1 October 2016 was mistakenly
accounted for as Rs. 863,000.

Required:
Prepare necessary adjusting and closing entries for the year ended 31 December 2016.
(14)

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Depreciation Question 1

ANSWER 1 – Depreciation (CAF1 S17)

Adjusting and Closing entries

Date / Particulars Dr. Rs. Cr. Rs.
Sr
(i) (a) Drawings 205,800
Accumulated depreciation W1 39,200
Fixed assets 245,000
W1
[245,000 x 20% x 6/12] + [220,500 x 20% x 4/12] = Rs. 39,200
Accumulated depreciation 29,400
Depreciation 29,400
[220,500 x 20% x 8/12 = Rs. 29,400
(i) (b) Loss on disposal 418,133
Accumulated depreciation W1 381,867
Fixed assets 800,000
W1
[800,000 x 20% x 12/12] + [640,000 x 20% x 12/12] + [512,000
x 20% x 11/12] = Rs. 381,867
Accumulated depreciation 8,533
Depreciation 8,533
[512,000 x 20% x 1/12 = Rs. 8,533
(i) (c) Fixed assets 75,000
Purchases / Inventory 75,000
Depreciation 12,500
Accumulated depreciation 12,500
[75,000 x 20% x 10/12 = Rs. 12,500
(ii) Fixed assets 240,000
Installation charges payable 240,000
Depreciation 4,000
Accumulated depreciation 4,000
[240,000 x 20% x 1/12 = Rs. 4,000
(iii) Payable for fixed assets 180,000
Fixed assets 180,000
Accumulated depreciation 9,000
Depreciation 9,000
[180,000 x 20% x 3/12 = Rs. 9,000
Closing Statement of comprehensive income 1,579,700
Gain on disposal (Trial balance) 58,000
Depreciation (trial balance ± corrections) 1,219,567
Loss on disposal (i)(b) 418,133

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