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The Reduction in the Value of Assets

   

Added on  2020-03-15

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Solution-1Depreciation refers to the reduction in the value of assets due to passage of time and normal wear andtear. The depreciation should be recorded timely, else the financial statements will not reflect the true andfair view. For determining the depreciation for the first year, the following information’s are required:1.Asset cost– The cost at which assets is acquired. It includes purchase price, freight paid, taxesor any other cost incurred to put the assets to use.2.Estimated useful life of assets – Estimated useful life means the period upto which asset cangenerate future economic benefits. Or in simple words, the period upto which the asset isexpected to be used.3.Estimated Salvage Value – This is the amount that is expected to be realized by selling ortransferring the assets at the end of its useful life.4.Method of Depreciation– After computing the above factors, the company needs to decide uponthe method that will be used to depreciate the assets. The following methods are available forcomputation of depreciation: a.Straight Line Method b.Written Down Value Methodc.Units of Production Method References:1.Accounting, Financial, Tax. (2017). How To Calculate And Record Depreciation [of Fixed Asset]. [online] Available at: http://accounting-financial-tax.com/2009/04/how-to-calculate-and-record-depreciation-of-fixed-asset/ [Accessed 23 Sep. 2017].
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Solution-2Journal Entries in the books of Midnight Boil Ltd.DateParticulars Debit Credit 30 June, 2018Capital Work in Progress12,550,000To Cash12,550,000(To record expenses incurred on construction of plant)30 June, 2018Capital Work in Progress4,001,500To Cash4,001,500(To record other expenses incurred on construction)1 July, 2018Nuclear Power Plant16,551,500To Capital Work in Progress16,551,500(To record asset)1 July, 2018Nuclear Power Plant (refer WN-1)809,641To Provision for Asset Retirement Obligation809,641(To record provision for dismantling costs)30 June, 2019Interest expense 80,964To Provision for Asset Retirement Obligation80,964(To record interest expense on dismantling costs)30 June, 2024Interest expense (refer WN-2)130,393To Provision for Asset Retirement Obligation130,393(To record interest expense on dismantling costs)WN-1Calculation of Dismantling Costs:Cost of Plant16,551,500Useful life (in years)10Dismantling Costs2,100,000Discount rate10%PV as on 1 July, 2018809,641WN-2Interest expense scheduleParticulars Interest exp Provision for ARO 30 June, 2018-809,64130 June, 201980,964.09890,605
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30 June, 202089,060.50979,66530 June, 202197,966.551,077,63230 June, 2022107,763.201,185,39530 June, 2023118,539.531,303,93530 June, 2024130,393.481,434,32830 June, 2025143,432.831,577,76130 June, 2026157,776.111,735,53730 June, 2027173,553.721,909,09130 June, 2028190,909.092,100,000
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