1. Financial Accounting
1
Lecture – 19
Recap
• Disposal of fixed assets
• Policies for fixed assets
• Journal entries
 In case of straight line method
 Written down value method

2. Financial Accounting
2
Lecture – 19
• In case an asset is not complete at the time preparing the
balance sheet then the costs incurred on that asset till the
date of balance sheet are shown in “Capital Work In
Progress Account”

3. Financial Accounting
3
Lecture – 19
• “Capital Work In Progress Account” is shown as a separate
head in the balance sheet.

4. Financial Accounting
4
Lecture – 19
• At the time of completion all the costs are transferred to
fixed assets account from capital work in progress account.
• Journal entry
 Debit Fixed Asset (relevant account)
 Credit Capital Work in Progress Account

5. Financial Accounting
5
Lecture – 19
• All costs incurred on the asset until it is brought to the state
of its intended use are included in its cost.
• These costs may include:
 Freight
 Cost of assembling
 Financial costs
 Legal cost

6. Financial Accounting
6
Lecture – 19
Example 1
• A machine costs Rs. 500,000.
• Its useful life is five years.
• At the end of five years its residual value is expected to be
Rs. 31,000.
• At the end of four year the machine was sold for Rs. 50,000.
• Required.
 Show the calculations of depreciation for the four years
using both reducing balance and straight line method.
 For WDV assume depreciation rate to be 50%
 Calculate the profit / loss on disposal in both cases

7. Financial Accounting
7
Lecture – 19
Example 1
• For straight line method Depreciation is calculated as
follows.
• Depreciable Amount = 500,000 – 30,000 = 470,000
• Annual Depreciation = 470,000 / 4 = 117,500

8. Financial Accounting
8
Lecture – 19
Example 1
Yr Straight Line WDV
1 Cost 500,000 Cost 500,000
Dep. (117,500) Dep. 500000 x 50% (250,000)
WDV 382,500 250,000
2 Dep. (117,500) Dep. 250000 x 50% (125,000)
WDV 265,000 WDV 125,000
3 Dep. (117,500) Dep 125,000 x 50% 62,500
WDV 147,500 WDV 62,500
4 Dep. (117,500) Dep 62,500 x 50% 31,250
WDV 30,000 WDV 31,250
Selling Price 31,000 31,000
Profit 1,000 Loss (250)

9. Financial Accounting
9
Lecture – 19
Example 2
• Following information is available for Machinery Account in
Year 4:
 One machine purchased on Jul 1, Year 1 for Rs. 50,000
 One machine purchased on Jan 1, Year 2 for Rs. 75,000
 One machine purchased on Apr 1, Year 3 for Rs.
100,000
 Machine 1 is disposed off on Sep 30, Yr 4.
• Depreciation is charged at 25% reducing balance method.

10. Financial Accounting
10
Lecture – 19
Example 2
• Show the calculations of depreciation on machinery for the
four years, applying following policies:
 (1) Depreciation is charged on the basis of use
 (2) Full depreciation on the year of purchase and no
depreciation in the year of disposal.

11. Financial Accounting
11
Lecture – 19
Year 1: One machine purchased on Jul 1, Year 1 for Rs. 50,000
• Policy 1
WDV Opening Balance 0
Purchase of Machine 50,000
50,000
Depreciation (50,000 x 25%) x 6/12 (6,250)
WDV Closing Balance 43,750

12. Financial Accounting
12
Lecture – 19
Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000
• Policy 1
WDV Opening Balance 43,750
Purchase of Machine 75,000
118,750
Depreciation (118,750 x 25%) (29,688)
WDV Closing Balance 89,062

13. Financial Accounting
13
Lecture – 19
Year 3: One machine purchased on Apr 1, Year 3 for Rs. 100,000
• Policy 1
WDV Opening Balance 89,062
Purchase 100,000
189,062
Depreciation (89,062 x 25%) (22,265)
Depreciation (100,000 x 25%) x 9 / 12 (18,750)
WDV Closing Balance 148,047

14. Financial Accounting
14
Lecture – 19
Year 4: Machine 1 is disposed off on Sep 30, Year 4
• Policy 1
WDV Opening Balance 148,047
Dep. Machine 1 (4,614)
Dep. Others (148,047 – 24,609) x 25% (30,860)
112,573
WDV of Asset Disposed (19,995)
WDV Closing Balance 92,578

15. Financial Accounting
15
Lecture – 19
• WDV of machine sold in Year 4:
Cost Year 1 50,000
Dep. Year 1 (50000 x 25 %) 6/12 6,250
WDV Year 1 43,750
Dep. Year 2 (43750 x25%) 10,938
WDV Year 2 32,812
Dep. Year 3 (32,812 x 25%) 8,203
WDV Year3 24,609
Dep. Year 4 (24,609 x 25%) x 9 / 12 4,614
WDV Year4 19,995

16. Financial Accounting
16
Lecture – 19
Year 1: One machine purchased on July 1, Year 1 for Rs. 50,000
• Policy 2
WDV Opening Balance 0
Purchase Cost 50,000
50,000
Dep. (50,000 x 25%) (12,500)
WDV Closing Balance 37,500

17. Financial Accounting
17
Lecture – 19
Year 2: One machine purchased on Jan 1, Year 2 for Rs. 75,000
• Policy 2
WDV Opening Balance 37,500
Purchase Cost 75,000
112,500
Dep. (112,500 x 25%) (28,125)
WDV Closing Balance 84,375

18. Financial Accounting
18
Lecture – 19
Year 3: One machine purchased on Apr 1, Year 3 for Rs. 100,000
• Policy 2
WDV Opening Balance 84,375
Purchase Cost 100,000
184,375
Dep. (184,375 x 25%) (46,094)
WDV Closing Balance 138,281

19. Financial Accounting
19
Lecture – 19
Year 4: Machine 1 is disposed off on Sep 30, Year 4
• Policy 2
WDV Opening Balance 138,281
WDV of Disposed Off Machine (21,094)
117,187
Dep. (117,187 x 25%) (29,297)
WDV Closing Balance 87,890

20. Financial Accounting
20
Lecture – 19
Machine Disposed Off in Year 4
Cost Year 1 50,000
Dep. Year 1 (50000 x 25 %) 12,500
WDV Year 1 37,500
Dep. Year 2 (37500 x25%) 9,375
WDV Year 2 28,125
Dep. Year 3 (28,125 x 25%) 7,031
WDV Year 3 21,094

21. Financial Accounting
21
Lecture – 19
Example 3
• A machine costs Rs. 500,000.
• Its useful life is five years.
• At the end of five years its residual value is expected to be
Rs. 30,000.
• At the end of four year the machine was sold for Rs. 31,000.
• Depreciation is charged on the basis of use.

22. Financial Accounting
22
Lecture – 19
• Required.
 Show the calculations of depreciation for the four years
using both reducing balance and straight line method.
 For WDV assume depreciation rate to be 50%
 Calculate the profit / loss on disposal in both cases

23. Financial Accounting
23
Lecture – 19
Straight Line Method
Depreciable Amount = 500,000 – 30,000 = 470,000
Annual Depreciation = 470,000 / 4 = 117,500
Annual Depreciation = 470,000 / 5 = 94,000

24. Financial Accounting
24
Lecture – 19
Written Down Value Method
Year Written Down Value Method Rs.
1 Cost 500,000
Dep. 500,000 x 50% (250,000)
Written Down Value 250,000
2 Dep. 250,000 x 50% (125,000)
Written Down Value 125,000
3 Dep. 125,000 x 50% 62,500
Written Down Value 62,500
4 Dep. 62,500 x 50% 31,250
Written Down Value 31,250
Selling Price 31,000
Loss On Disposal (250)

25. Financial Accounting
25
Lecture – 19
Straight Line Value Method
Year Straight Line Method Rs.
1 Cost 500,000
Depreciation (94,000)
Written Down Value 406,000
2 Depreciation (94,000)
Written Down Value 312,000
3 Depreciation (94,000)
Written Down Value 218,000
4 Depreciation (94,000)
Written Down Value 124,000
Selling Price 31,000
Loss on Disposal 93,000