Course Content
New Accounting Model (Exam-2009)
Books references: 1. Account Code (Volume III). 2. Chart of Accounts (Issued by CGA). 3. Manual Accounting Principles. 4. Accounting Policies and Procedures Manual.
Private: DAO Part-I Examination 2024 (Fresh Candidates) Past Papers
About Lesson
The cost of removal which was Rs.20,000/- will be capitalized. The machine will be recognized in the SOFP (balance sheet) as:-
Cost of machine Rs.
Add: dismantling costs of old machine Rs.
To SOFP (balance sheet) Rs.

Certainly! Let’s account for the dismantling costs of the old machine and recognize the new machine in the balance sheet (Statement of Financial Position):

  1. Dismantling Costs of Old Machine:

    • The cost of removing the old machine (Rs. 20,000/-) will be capitalized.
    • This means we treat it as part of the cost of the new machine.
  2. Recognition in the Balance Sheet:

    • We’ll recognize the new machine in the balance sheet.
    • The entry will include both the cost of the new machine and the capitalized dismantling costs.

Journal Entry:

  • Debit: New Machine (Cost of Machine) Account: Rs. 50,000/- (purchase price of the new machine)
  • Debit: Dismantling Costs (Capitalized) Account: Rs. 20,000/- (cost of removing the old machine)
  • Credit: Cash/Bank Account: Rs. 70,000/- (payment made for the new machine and dismantling costs)

The balance sheet will show:

  • Assets:
    • New Machine: Rs. 50,000/- (cost of the new machine)
    • Accumulated Depreciation (New Machine): Depreciation on the new machine over its useful life
    • Total: Rs. 50,000/-
  • Liabilities and Equity:
    • Cash/Bank: Rs. 70,000/- (payment made)
    • Total: Rs. 70,000/-

Remember that the dismantling costs are capitalized because they are directly related to bringing the new machine into operation.

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