A firm charges depreciation on machinery at 10% per annum under the Straight Line Method using the Provision for Depreciation Account. Machinery was purchased on 1st April 2021 for ₹1,00,000. On 1st April 2023, after two years' depreciation had been provided, the machinery was so

Question

A firm charges depreciation on machinery at 10% per annum under the Straight Line Method using the Provision for Depreciation Account. Machinery was purchased on 1st April 2021 for ₹1,00,000. On 1st April 2023, after two years' depreciation had been provided, the machinery was sold for ₹75,000. Pass the necessary journal entries and prepare the Machinery Account, Provision for Depreciation Account and Machinery Disposal Account.

Accepted Answer

**Step 1 — Depreciation and accumulated provision.** Annual depreciation = 10% of 1,00,000 = ₹10,000. After two years (2021-22 and 2022-23), accumulated depreciation in the Provision Account = 10,000 + 10,000 = **₹20,000**. Book value on 1st April 2023 = 1,00,000 − 20,000 = **₹80,000**.

**Step 2 — Profit or loss on sale.**
Profit/(Loss) = Sale Proceeds − Book Value = 75,000 − 80,000 = **−₹5,000, a Loss on Sale of ₹5,000**.

**Step 3 — Journal entries (on disposal, 1st April 2023).**

(i) Provision for Depreciation A/c ...Dr 20,000
   To Machinery Disposal A/c 20,000
(Being accumulated depreciation on the machinery transferred)

(ii) Machinery Disposal A/c ...Dr 1,00,000
   To Machinery A/c 1,00,000
(Being original cost of machinery transferred)

(iii) Bank A/c ...Dr 75,000
   To Machinery Disposal A/c 75,000
(Being sale proceeds received)

(iv) Profit and Loss A/c ...Dr 5,000
   To Machinery Disposal A/c 5,000
(Being loss on sale — the balancing figure — transferred to Profit and Loss Account)

**Step 4 — Machinery Account (stays at cost until disposal).**

*2021-22:* To Bank A/c 1,00,000 | By Balance c/d 1,00,000 (Total 1,00,000 both sides)
*2022-23:* To Balance b/d 1,00,000 | By Balance c/d 1,00,000 (Total 1,00,000 both sides)
*2023-24:* To Balance b/d 1,00,000 | By Machinery Disposal A/c 1,00,000 (Total 1,00,000 both sides)

**Step 5 — Provision for Depreciation Account.**

*2021-22:* To Balance c/d 10,000 | By Depreciation A/c 10,000 (Total 10,000 both sides)
*2022-23:* To Balance c/d 20,000 | By Balance b/d 10,000; By Depreciation A/c 10,000 (Total 20,000 both sides)
*2023-24:* To Machinery Disposal A/c 20,000 | By Balance b/d 20,000 (Total 20,000 both sides) …

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