Page 243 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

Notes
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Case Study Tata Steel Ltd.

ata Steel Ltd. wants to establish its EOU in the state of Orissa through exploration of
iron ore. It identified that the state of Orissa is one of the ideal states having greater
Tpotential of iron ore than any other state in India. The firm has reached lease
contract with the Government of Orissa for the amount of 200 Cr towards the extraction
of 40,00,000 tonnes iron ore from the field for 10 years. The firm would like to establish a
processing plant which amounts to 50 Cr to produce the quality carbon steel for the
foreign industrial buyers. The life period of the machine is denominated in terms of
2,50,000 working hours. The firm is required to extract the iron ore.

Year 1 2 3 4 5 6 7 8 9 10
Expected Extraction 8 7 6 5 4 3 3 2 1 1
Per Year in Lakh
Hrs. Working 1,00,000 75,000 25,000 12,500 6,250 6,250 6,250 6,250 6,250 6,250

To meet out the cost of escalation, the firm should invest the amount of depreciation in the
interest bearing securities. The rate of interest is 8%.
Questions
1. To go for further replacement after 10 years, how much should the firm charge
depreciation in the case of iron ore field ? Which method should be applied? Reason
out the suitability of the method opted.
2. To replace the machinery recently bought after 10 years how much should be charged
as depreciation in accordance with the working hours given? Which method is
considered to be most suitable to replace? Why?
3. To replace the both investments viz on the iron ore field and processing unit, how
much the firm should invest during the 10 years time span?

Self Assessment

State true or false:

9. Amount of depreciation, if charged on the basis of written down value method, increases
every year.
10. Depreciation is charged to find out the correct P&L accounting balance.
11. The depreciation charge is a mean to recover the cost of operations of the enterprise.
12. Under written down value method depreciation is charged on the original value of the
asset.
13. The following formula to highlights the application of Diminishing Balance method in
charging depreciation is = (S/C)1/n – 1.

14. Profit or loss arises from the sale of the assets is carried to profit and loss appropriation
account.
15. When provision for depreciation account is maintained the assets are shown in the books
at their original cost.

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