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CSEET · Fundamentals of Accounting · Depreciation and Amortization

Mehta Pvt Ltd uses a machine in its factory to manufacture goods. During the year, depreciation of Rs 60,000 was calculated on this plant, and all the goods produced remained unsold in closing inventory. What is the correct treatment under AS 10?

The Rs 60,000 should be included in the cost of conversion of the inventories. AS 10 says depreciation is charged to profit and loss unless the asset's benefits are absorbed in producing another asset, in which case it forms part of that asset's carrying amount.

  1. ACharge the full Rs 60,000 to the statement of profit and loss, since depreciation is always an expense
  2. BAdd the Rs 60,000 to the cost of conversion of inventories, as the benefits of the asset were absorbed in producing another assetCorrect
  3. CDeduct Rs 60,000 directly from the reserves
  4. DIgnore it because the goods are unsold

Explanation

The depreciation charge is recognised in the statement of profit and loss unless it is included in the carrying amount of another asset. Depreciation of manufacturing plant is included in costs of conversion of inventories (AS 2). Since all goods remain unsold, the amount sits in inventory, so charging it fully to profit and loss is wrong.

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