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Question
An asset is purchased on 1.1.2016 for ₹ 50,000. Depreciation is to be provided annually according to the straight-line method. The useful life of the asset is 10 years and its residual value is ₹ 10,000. Accounts are closed on 31st December every year. You are required to find out the rate of depreciation and give journal entries for first two years.
Solution
Original cost = ₹ 50,000
Residual value = ₹ 10,000
Estimated life = 10 years
Amount of depreciation = `("Original cost" - "Scrap value")/"Estimates life"`
`= (50,000 - 10,000)/10`
`= (40,000)/10`
= ₹ 4,000
Rate of depreciation = `"Amount of depreciation"/"Original cost" xx 100`
`= (4,000)/(50,000) xx 100`
= 8%
Journal entry
| Date | Particulars | J.F. | Debit ₹ | Credit ₹ |
| 1.1.2016 | Machinery A/c Dr. To Bank A/c (Machinery bought) |
50,000 | 50,000 | |
| 31.12.2016 | Depreciation A/c Dr. To Machinery A/c (Depreciation provided) |
4,000 | 4,000 | |
| 31.12.2016 | Profit and loss A/c Dr. To Depreciation A/c (Depreciation transferred to profit and loss A/c) |
4,000 | 4,000 | |
| 31.12.2017 | Depreciation A/c Dr. To Machinery A/c (Depreciation provided) |
4,000 | 4,000 | |
| 31.12.2017 | Profit and loss A/c Dr. To Depreciation A/c (Depreciation transferred to profit and loss A/c) |
4,000 | 4,000 |
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