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The Depreciation Amount for Asset

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Added on  2020-03-15

The Depreciation Amount for Asset

   Added on 2020-03-15

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Solution-1Depreciation is a non-cash expense for the organisation and hence do not impact cash flow. However, toprepare true and fair view of financial statements, it is necessary to estimate the amount of depreciationcorrectly. Following information is required for estimating the depreciation amount for any asset:a)Cost of assetb)Useful life of assetc)Residual value of asset after useful lifeExplanation of above elements is given below:a)Cost of asset – It includes cost of purchase, freight charges, installation charges, custom duty,etc. paid to bring the asset to its present location so that it can be used. It is very important tocalculate cost of asset correctly as depreciation calculation is majorly depended upon this element(Bragg and Bragg, 2017). For example, if a machinery is purchases, cost of asset would includeamount paid to supplier, freight charges to bring machinery to factory and its installation chargesto make the machine functional.b)Useful life of asset – Useful life refers to the period during which asset will be used by theorganisation. It is an estimated period during which organisation estimates that asset will servethe organisation. After this period, asset is retired and sold or scraped. Depreciation of any assetis charged during the useful life (Bragg and Bragg, 2017).c)Residual Value of asset after useful life – Residual value refers to the amount whichorganisation expects from the sale of asset. In some cases, asset is scrapped, so there will not beany residual value. However, in most of the cases, after useful life, asset is sold off. This amountis deducted from the cost of asset to arrive at the amount which is to be charged as depreciationover the useful life of the asset.References:Bragg, S. and Bragg, S. (2017). Which costs to assign to a fixed asset. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/which-costs-can-i-assign-to-a-fixed-asset.html [Accessed 8 Oct. 2017].Bragg, S. and Bragg, S. (2017). Useful life. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/2017/5/11/useful-life [Accessed 8 Oct. 2017].
The Depreciation Amount for Asset_1
Journal Entries in the books of Midnight Boil Ltd.DateParticulars Debit Credit 30-Jun-18Capital Work in Progress A/c12,550,000To Cash A/c12,550,000(To record expenses incurred for construction)30-Jun-18Capital Work in Progress A/c4,001,500To Cash A/c4,001,500(To record expenses incurred for construction)01-Jul-18Nuclear Power Generator A/c16,551,500To Capital Work in Progress A/c16,551,500(Construction completed and asset recognised)01-Jul-18Nuclear Power Generator A/c 809,641*To Provision for Asset Retirement Obligation A/c809,641(Provision for dismantling cost recorded)30-Jun-19Interest expense A/c80,964To Provision for Asset Retirement Obligation A/c80,964(Interest expenses incurred on dismantling cost recorded)30-Jun-24Interest expense A/c130,393**To Provision for Asset Retirement Obligation A/c130,393(Interest expenses incurred on dismantling cost)*(2,100,000/ (1 + 10%)10)**Calculation of Interest expensesDate Interest expenses Provision for ARO30-Jun-18-809,64130-Jun-80,964890,605
The Depreciation Amount for Asset_2
1930-Jun-2089,060979,66530-Jun-2197,9671,077,63230-Jun-22107,7631,185,39530-Jun-23118,5401,303,93530-Jun-24 130,393 1,434,328 30-Jun-25 143,433 1,577,761 30-Jun-26 157,776 1,735,537 30-Jun-27 173,554 1,909,091 30-Jun-28 190,909 2,100,000 Solution – 3(a)Calculation of Gross ProfitParticulars201520162017Contract Price50,000,000 50,000,000 50,000,000Less: - Cost for the year 10,000,000 28,000,000 40,000,000 - Estimated costs to complete 28,000,000 12,000,000 - Total38,000,000 40,000,000 40,000,000Estimated Profit 12,000,000 10,000,000 10,000,000 Percentage completed26.32%70.00%100.00%Profit recognised for the year 3,157,895 3,842,105 3,000,000 (b)Journal entries for the 2015 financial year using the percentage-of-completion methodParticulars Debit Credit
The Depreciation Amount for Asset_3

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