Accountancy 6 Marks Question

Two basic methods of charging depreciation are:
Straight line method: This method calculates fixed amount of depreciation every year which is calculated keeping in view the useful life of assets and its salvage value at the end of its useful life.
Written down value method: This method uses current book value of the asset for computing the amount of depreciation for the next period. It is also known as declining balance method.
Differences:
1. Equal amount of depreciation is charged in straight line method. Amount of depreciation 6 goes on decreasing every year in written down value method.
2. Depreciation is charged on original cost in straight line method. The amount is calculated on the book value every year.
3. In straight line method the value of asset can come to zero but in written down value method this can never be zero.
4. Generally rate of depreciation is low in case of straight line method but it is kept high in case of written down value method.
5. It is suitable for assets in which repair charges are less and the possibility of obsolescence is less. It is suitable for the assets which become obsolete due to changes in technology.

(a) CASH FLOW FROM OPERATING ACTIVITIES

Particulars	Details	Amount
Profit Earned during the year	(1,00,000)
Add: Proposed dividend of previous year	1,50,000
Provision for tax for current year	1,20,000
Profit before tax and extraordinary items	1,70,000
Non-operating and Non Cash Items:
Add: Goodwill amortised	50,000
Operating profit before tax and changes in working capital	2,20,000
Add: Increase in trade payable	50,000
Less: increase in trade receivables	(40,000)
Cash generated from operations	2,30,000
Less: Income tax paid	1,00,000
Cash flow from operating activities		1,30,000

OR

Accumulated Depreciation A/c
Particulars	Amount	Particulars	Amount
To Machinery A/c (prev. dep on machine damaged)	10,000	By Balance b/d	4,00,000
To Machinery A/c (prev. dep on machine sold)	90,000	By Depreciation A/c (Charged during the year)	3,50,000
To Balance c/d	6,50,000
	7,50,000		7,50,000

Dr	Machinery A/c		Cr
Particulars	Amount	Particulars	Amount
To Balance b/d	20,00,000	By Accumulated Depreciation A/c	10,000
To Bank A/c (Balancing figure)	11,00,000	By Insurance Company A/c	32,000
		By loss by fire A/c	8,000
		By Bank A/c	1,40,000
		By Loss on Sale A/c	20,000
		BY Accumulated Depreciation A/c	90,000
		By Balance c/d	28,00,000
	31,00,000		31,00,000

Investing Activities

Sale of Machinery	1,40,000
Claim received from Insurance Company	32,000
Machinery Purchased	(11,00,000)
Cash Outflow from Investing Activities	(9,28,000)