A transport company purchases a truck for Rs.2,00,000 on 1st January, 2009. It charges 20% depreciation p.a. according to w.d.v. method. The truck was sold on 1st July, 2010 for a sum of Rs.1,60,000. The profit or loss on sale of truck is
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Solution
To calculate the gain or loss on the sale of a fixed asset, one has to figure out the asset’s book value up
to the date of sale.
Under WDV method, depreciation is charged at a fixed rate every year, on the reducing balance. A
certain percentage is applied to the previous year’s book value, to arrive at the current year’s depreciation/
book value, which shows a declining balance, weighted for earlier years, and lower and lower for later
years, as the machine grows older.
Lets find the WDV as on 1-07-2010 of the machine in question
Original cost as on 1-1-2009 = 2,00,000
31-12-2009 depreciation @20%pa = 2,00,000 × 0.2 = 40,000
31-12-2009 wdv = 2,00,000 – 40,000 = 1,60,000
30-6-2010 depreciation for the half year = 1,60,000 × 20% × 1/2 = 16,000
30-9-2010 wdv = 1,60,000 – 16,000 = 1,44,000
30-9-2010 sale price = 1,60,000
Thus profit on sale = 1,60,000 – 1,44,000 = Rs. 16,000
A firm has an average profit of Rs.60,000. Rate of return on capital employed is 12.5% p.a. Total capital employed in the firm was Rs.4,00,000. Goodwill on the basis of two years purchase of super profits is
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Solution
Under this method Goodwill is calculated on the basis of Super Profits i.e. the excess of actual profits
over the average profits.
For calculating Goodwill:
(i) Normal Profits = Capital Invested × Normal rate of return/100
(ii) Super Profits = Actual Profits – Normal Profits
(iii) Goodwill = Super Profits × No. of years purchased
Here normal profit = 4,00,000 × 12.5% = 50,000
Super profit = 60,000 – 50,000 = 10,000
Goodwill = 10,000 × 2 = Rs. 20,000
Mr. A is a partner in a firm along with Mr. B. Both contributed capitals of Rs.40,000 and Rs.50,000 respectively on the 1st of July, 2009. Interest on capital is to be charged @ 10% p.a. Books of account are to be closed on 31st December, 2009. Interest on capital is
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Solution
Interest is paid on capital for the reason that it has been used for the purpose of the partnership business.
Since the capital was contributed on 1 July, 2009 and the books are being closed on 31st Dec. 2009. Thus
interest on capital will be calculated for half a year:
For A = 40,000 × 10% × 6/12 = 2,000
For B = 50,000 × 10% × 6/12 = 2,500
So total interest on capital will be = Rs. 4,500
Ram and Gopal are partners sharing profits and losses in the ratio of 2:1. Gopal gave a loan of Rs.12,000 to the firm. They did not have any specific agreement about interest on loan mentioned in the partnership deed. Gopal claims interest on loan @ 10% p.a. The interest on loan as per the rules of the Partnership Act, 1932 will be:
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Solution
Partners are entitled to receive interest at an agreed rate of interest on any Loan given by them to the firm. Interest on Loan is a charge against profits so a partner is entitled to receive interest whether there are profits or not. If there is no agreement regarding the rate of interest, it is taken as 6% p.a.
So as nothing is mentioned in the deed of partnership regarding the interest on loan so interest on Gopal’s loan will be paid at 6% pa.
Interest on Gopal’s loan will be = 6% of Rs. 12,000 = Rs. 720
On 1st January, 2009, Alpha Ltd. purchased a machine for Rs.50,000 and spent Rs.4,000 on its carriage and Rs.2,000 on its installation. On the date of purchase, it was estimated that the effective life of the machine will be 10 years and after 10 years its scrap value will be Rs.6,000. Depreciation is charged on straight line basis. Depreciation for the year 2009 will be
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Solution
Straight line method depreciates cost evenly throughout the useful life of the fixed asset.
Straight line depreciation is calculated as follows:
Depreciation per annum = (Cost – Residual Value) / Useful Life
Where:
Cost includes the initial and any subsequent capital expenditure.
Residual Value is the estimated scrap value at the end of the useful life of the asset. As the residual value
is expected to be recovered at the end of an asset’s useful life, there is no need to charge the portion of
cost equaling the residual value.
Useful Life is the estimated time period an asset is expected to be used from the time it is available for
use to the time of its disposal or termination of use.
Cost of the machinery = purchase price + installation expenses + carriage = 50000 + 2000 + 4000 = Rs.56,000
Depreciation = (56,000 – 6,000)/10 = Rs. 5,000
Our acceptance to Mr. A for Rs.8,000 renewed for 3 months on the condition that Rs.2,000 is paid in cash immediately and the new bill to be drawn for remaining balance to carry out interest at 18% p.a. The amount of the renewed bill of exchange will be
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Solution
Sometimes, acceptor of a bill finds himself unable to meet his acceptance on the due date. So he may approach the drawer of the bill before the maturity date arrives, to cancel the old bill and draw a new bill with extended date. The acceptor in this case will of course have to pay interest for the extended period.
Total amount of the bill = 8,000
Amount paid in cash = Rs. 2,000
Amount due = Rs. 6,000
Interest for 3 months @18%pa = 6,000 × 18/100 × 3/12 = Rs. 270
The amount of renewed bill will be = 6,000 + 270 = Rs. 6,270
Advertisement expenditure of Rs.10,000 paid on 30.12.2009, the advertisement in respect of
which has appeared in the magazines of January, 2010.
This expenditure will be
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Solution
The expenditure will shown as prepaid expense in Financial statements for the year ended 31.12.09.
A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They have invested capitals of Rs.40,000 and Rs.25,000 respectively. As per the partnership deed, they are entitled to interest on capital @ 5% p.a. before dividing the profits. During the year, the firm earned a profit of Rs.3,900 before allowing interest. The net profit will be apportioned as
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Solution
Profit of the firm before allowing interest on capital = Rs. 3,900
Interest on capital of A = 5% of 40,000 = Rs. 2,000
Interest on capital of B = 5 % of 25,000 = Rs. 1,250
Profit after interest = 3,900 – 2,000 – 1,250 = Rs. 650
The profit sharing ratio of A and B is 3 : 2
Thus profit shared by A = 650 × 3/5 = Rs. 390
And profit shared by B = 650 × 2/5 = Rs. 260
A and B are partners in a firm. During the year 2009, A withdrew Rs.1,000 p.m. and B withdraw Rs.500 p.m. on the first day of each month for personal use. Interest on drawings is to be charged @ 10% p.a. The interest on drawings will be
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Solution
The drawings are usually made by the partners at regular intervals. Thus, the interest on drawings is
calculated with reference to the time period involved.
Monthly/quarterly drawings method: If uniform amount is withdrawn at each time and the interval between
two withdrawals also is uniform. In such a case interest on drawings is calculated with monthly drawings
method. Time period in this method is calculated as follows:
When drawings are for 12 months period and at the beginning of each month = Total drawings × Rate/ 100 × 6.5/12
So interest on drawings of A will be = 1,000 × 12 × 10/100× 6.5/12 = 650
And interest on drawings of B will be = 500 × 12 × 10/100× 6.5/12 = 325
Total interest on drawings = 650 + 325 = Rs. 975
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Solution
The provision created to cover the next year’s bad debt expense out of the current year’s debtors is known as provision for bad debts. This provision is created on the debtors after deducting the current year’s bad debt.
Accounts receivable = 30,000
Less furthur bad debts = 3,000
Provision for bad debts = 10% of (30,000 – 3,000) = Rs. 2,700