Page 222 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 10. In historical cost financial statements, gains or losses arising on disposal are generally
recognized in the profit and loss statement.
11. On disposal of a previously revalued item of fixed asset, the difference between net disposal
proceeds and the net book value is normally charged or credited to the profit and loss
statement except that, to the extent such a loss is related to an increase which was previously
recorded as a credit to revaluation reserve and which has not been subsequently reversed
or utilized, it is charged directly to the account. The amount standing in revaluation
reserve following the retirement or disposal of an asset which relates to that asset may be
transferred to general reserve.

Notes Reasons for Depreciation
1. Wear and Tear of the Asset: The long term assets are becoming less efficient and
poor quality in operations due to the continuous usage of the asset.
2. Exhaustion: Nothing will be left due to the continuous extraction of resources. The
resources in the oil wells, mine fields will be completely exhausted due to incessant
extraction. This has to be replaced by a new method of exploration. Investment in
new exploration methods requires depreciation as a charge against the revenues of
the wells/fields.

For example, Oil & Natural Gas Corporation Ltd. (ONGC) indulges in the process of
new oil exploration projects through research projects. The new projects should
then be identified and invested by huge initial investment outlay through the current
revenues out of the existing projects on account of replacement due to depletion of
resources.
3. To face technological obsolescence: To replace the old machinery with new machinery,
before the expiry of the economic life period of the asset in order to maintain the
efficiency and economy of the asset. The typewriter was replaced by the electronic
typewriter during the yester periods of office automation. To replace the old
typewriter which is neither efficient nor economical, it should be replaced by the
new electronic typewriter through the depreciation charge on the old one.
4. Accident: The value of the asset mainly depends upon the efficiency and economy;
which gets affected due to accident.

10.1.2 Basis for the Valuation of Fixed Assets

As per AS-10, there are two bases to compute the gross book value of fixed assets. These are –
historical cost and revaluation. Gross book value of a fixed asset is its historical cost or the other
amount substituted for historical cost in the books of account of financial statements. When this
amount is shown as net of accumulated depreciation, it is termed as net book value.
Illustration 1: Aditya Co. Ltd. acquired machinery from Hindustan Machine Tools Ltd. on 30.9.2007
at a quoted price of 400 lakhs on which a cash discount of 5% was offered on immediate payment.
Value Added Tax (VAT) on the quoted price is 8%. The company incurred the following addition
expenses:

( )
Transit insurance 4,00,000
Transportation charges 10,00,000

216 LOVELY PROFESSIONAL UNIVERSITY