Fixed Assets Accounting using WDV MCQs Quiz | Class 10

Understanding Fixed Assets Accounting using Written Down Value (WDV) Method

This section will help you understand the core concepts and applications of the Written Down Value (WDV) method, also known as the Diminishing Balance Method or Reducing Balance Method, for depreciating fixed assets.

What is Depreciation?

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Fixed assets, except for land, lose value over time due to wear and tear, obsolescence, and usage. This loss in value is recognized as an expense in the Profit and Loss Account to reflect the true cost of using the asset and to match expenses with revenues.

The Written Down Value (WDV) Method

The WDV method is a widely used depreciation method where the depreciation charge for each period decreases over the asset’s useful life. Unlike the Straight Line Method (SLM), which charges a constant amount, WDV calculates depreciation on the book value (or Written Down Value) of the asset at the beginning of each accounting period, rather than its original cost.

Key Characteristics and Principles:

• Declining Depreciation Charge: The most distinctive feature is that the amount of depreciation charged is highest in the initial years and progressively decreases in subsequent years.
• Calculation Basis: Depreciation is calculated as a fixed percentage of the asset’s Written Down Value (Book Value) at the start of the current financial year.
• Asset Value Never Becomes Zero: Theoretically, under the WDV method, the book value of an asset will never reduce to zero, although it may become negligible. This is because depreciation is always calculated on a remaining positive balance.
• Matching Principle: This method aligns well with the matching principle. It assumes that assets provide more utility in their early years, thus charging higher depreciation. Additionally, in later years, while depreciation is lower, repair and maintenance costs tend to increase. The WDV method helps to equalize the total charge (depreciation + repairs) to the Profit and Loss Account over the asset’s useful life, providing a more stable impact on profits.
• Suitability: It is particularly suitable for assets that:
  • Lose more value in their early years (e.g., vehicles, machinery).
  • Require increasing repair and maintenance costs as they age.

Entries and Calculations under Diminishing Balance Method

1. Calculating Depreciation:

The formula for annual depreciation under the WDV method is:

Depreciation = Written Down Value at the beginning of the year x Rate of Depreciation

Example:

Suppose a machine is purchased for Rs. 1,00,000 on April 1, 2023. The rate of depreciation is 10% per annum using the WDV method.

2. Journal Entries:

Here are the typical journal entries related to depreciation using the WDV method:

• 1. For Purchase of an Asset (e.g., Machinery):

  Machinery Account Dr.
      To Bank/Cash Account
  (Being machinery purchased for cash/bank)

• 2. For Charging Depreciation at the end of the financial year:

  Depreciation Account Dr.
      To Machinery Account
  (Being depreciation charged on machinery for the year)

• 3. For Transferring Depreciation to Profit & Loss Account:

  Profit & Loss Account Dr.
      To Depreciation Account
  (Being depreciation transferred to Profit & Loss Account)

• 4. For Sale of an Asset (simplified entry):

  Bank/Cash Account Dr. (with sale price)
  Loss on Sale of Asset Account Dr. (if any)
      To Asset Account (with book value)
      To Profit on Sale of Asset Account (if any)
  (Being asset sold and profit/loss recorded)

Quick Revision Points:

• WDV Method: Depreciation on asset’s book value.
• Declining Charge: Depreciation amount reduces annually.
• Book Value: Never reaches zero, approaches asymptotically.
• Matching Principle: Aims to balance depreciation and repair costs over time.
• Journal Entries: Key entries include Depreciation Dr. to Asset Cr., and P&L Dr. to Depreciation Cr.

Practice Questions (Without Options):

1. A plant was acquired for Rs. 2,00,000. If depreciation is charged at 15% per annum on WDV, calculate the depreciation for the third year.
2. State two advantages of using the Written Down Value method over the Straight Line Method for depreciating machinery.
3. Why is it said that the book value of an asset under the WDV method never becomes zero?
4. Pass the journal entry for charging depreciation of Rs. 7,500 on furniture at the end of the financial year.
5. If the WDV of a vehicle at the beginning of a year was Rs. 80,000 and the depreciation rate is 12%, what would be the WDV at the end of that year?