Departmental overheads used in machine hour rate of depreciation are classified into following types −FixedVariableFixed charges − These are constant charges irrespective of machine hours. Rent, taxes, insurance, general expense etc.Some of the fixed charges are as mentioned below −Fixed expensesBasisRentFloor area occupied by machineInsuranceBased on capital value of machineSupervisoryExpenses ... Read More

Machine hour rate is called as service hour method. In this method, active hours of machine are taken into account for calculation of depreciation. This method is commonly used in sectors like chemicals, steel and other heavy industries.In this method, machine hour rate is established and charged to production. Machine ... Read More

The mileage method of depreciation is carried out on vehicles (cars, buses, etc.). In this method, depreciation is calculated based on number of kilometres travelled by the vehicle and asset means vehicle.FormulaDepreciation amount = (Ca-SVa) / TLaHere, Ca = cost of asset, SVa = scrap value of asset, TLa = ... Read More

Composite depreciation claims depreciation expenses by depreciates group of related assets into single entity than individual. Composite depreciation is the application of straight-line depreciation. If the asset is sold, then account entry is debited to cash and credited to fixed asset. The difference between original cost and sold cost is ... Read More

The major differences between working capital and fixed capital are as follows −Working capitalFixed capitalUsed for daily business activities.Used for long term benefits.Acquires current assets.Acquires non-current assets.If needed, these can be converted into cash immediately.If needed, these can’t be converted into cash immediately.It has liquidityIt has no liquidity.Serves short period ... Read More

Revaluation method of depreciation is the easiest method of depreciation. In this method, the asset value is assessed at the staring of the year and at the end of the year and difference between them is considered as depreciation to be charged. Revaluation method of depreciation will be done on ... Read More

The major differences between sinking fund depreciation and annuity method of depreciation.Sinking fund depreciationAmount generated through depreciation is invested in market securities.Funds available for replacement of assets.First entry of interest will be made at the end of second year.Sinking fund table is used to calculate depreciation.Cost – interest = depreciation ... Read More

SolutionThe solution is as follows −                    Journal entriesDateParticularsDrCr1-1-2000Lease accountTo Bank account(Being purchase of lease)250000250000Depreciation fund policy accountTo Bank account(Being the annual premium paid)450004500031-12-2000Profit and loss accountTo depreciation fund account(Being annual depreciation charge)45000450001-1-2001Depreciation fund policy accountTo bank account(Being annual premium paid)450004500031-12-2001Profit and ... Read More

Insurance policy method is just like sinking fund method of depreciation, but in this method, the money is used to pay premium for insurance company. Premium will be charged at the start of the year. Money at the end of maturity can be used to buy a new asset.    ... Read More

SolutionThe solution is explained below −Using the annuity tableRate for 4% for 10 years will be 0.130Annual depreciation charge = 200000 * 0.130 => 26000                    Lease accountDebit sideCredit sideYearYear1To cashTo interest20000080001920001By DepreciationBy Balance c/d260001660001920002To balance b/dTo interest16600066401593602To DepreciationTo balance c/d260001333601593603To balance ... Read More