Page 237 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

Illustration 7: Depreciation Fund Method Notes
On 1st January, 2003 a machinery was purchased for 1,00,000 by XYZ Co. Ltd, It is to be replaced
after four years. It is expected that investment will yield a net interest of 4% p.a. A depreciation
fund is established to collect the necessary amount.
On 31st December, 2006 the company had a balance of 45,500. The Depreciation Fund Investments
realised 73,500. The new machinery cost 1,07,500.
Pass the Journal entries and make the necessary accounts in the books of XYZ Co. Ltd.

Solution:
In the Books of XYZ Co. Ltd.,
Journal Entries
Date Particulars L.F. Amount (Dr.) Amount (Cr.)
( ) ( )
2003
Jan. 1 Machinery Account Dr. 1,00,000
To Cash Account 1,00,000
(Being purchase of machinery)
Dec. 31 Depreciation Account Dr. 23,549
To Depreciation Fund Account 23,549
(Being provision made for annual depreciation)
Dec. 31 Depreciation Fund Investment A/c Dr. 23,549
To Cash Account 23,549
(Being investment of annual depreciation)
2004
Dec. 31 Cash Account Dr. 942
To Depreciation Fund Account 942
(Being receipt of interest on last year’s investments)
Dec. 31 Depreciation Account Dr. 23,549
To Depreciation Fund Account 23,549
(Being provision made for annual depreciation)
Dec. 31 Depreciation Fund Investment A/c Dr. 24,491
To Cash Account 24,491
(Being investment of annual depreciation and interest
on last year’s investment)
2005
Dec. 31 Cash Account Dr. 1,922
To Depreciation Fund Account 1,922
(Being receipts of interest on the last year’s
investments of 48,040).
Dec. 31 Depreciation Account Dr. 23,549
To Depreciation Fund Account 23,549
(Being provision made for annual depreciation)
Dec. 31 Depreciation Fund Investment A/c Dr. 25,471
To Cash Account 25,471
(Being investment of annual depreciation and the
interest)
2006 Contd.. .
Dec. 31 Cash Account Dr. 2,940
To Depreciation Fund Account 2,940
(Being receipts of interest on the previous year’s
investments)
LOVELY PROFESSIONAL UNIVERSITY 231
Dec. 31 Depreciation Account Dr. 23,549
To Depreciation Fund Account 23,549
(Being provision made for annual depreciation)
2006
Dec. 31 Cash Account Dr. 73,500
Depreciation Fund Account Dr. 11
To Depreciation Fund Investment A/c. 73,511
(Being sale of D.F. Investment and loss thereon
transferred to D.F. Account)
Dec. 31 Depreciation Fund Account Dr. 1,00,000
To Machinery Account 1,00,000
(Being the transfer of machinery to depreciation fund
account)