A company purchased a machinery on 01-01-2015 for a sum of Rs. 60,000. The retail price index on that date was 150. What is the value of machinery according to CPP method on 31st December 2015, When the price index was 200.
Rs. 80,000
Understanding CPP Method Valuation for Machinery
The question asks us to determine the value of a machinery on a specific date using the Current Purchasing Power (CPP) method. The CPP method is a technique used in accounting to adjust historical costs to reflect changes in the general price level or the purchasing power of money. This is often referred to as inflation accounting.
Under the CPP method, non-monetary items like assets (machinery, land, etc.) are restated using a general price index. The idea is to express the historical cost in terms of the purchasing power of the currency at the balance sheet date. To restate a historical cost figure to its equivalent value at a later date, we use the following formula:
\( \text{Restated Value} = \text{Historical Cost} \times \left( \frac{\text{Price Index on Restatement Date}}{\text{Price Index on Date of Historical Cost}} \right) \)
Applying the CPP Formula to Machinery Valuation
Let's apply this formula to the given problem involving the machinery.
- Historical Cost of Machinery: Rs. 60,000
- Date of Historical Cost (Purchase Date): 01-01-2015
- Price Index on Date of Historical Cost (01-01-2015): 150
- Restatement Date (Valuation Date): 31st December 2015
- Price Index on Restatement Date (31st December 2015): 200
Now, we can plug these values into the formula:
\( \text{Value of Machinery on 31st Dec 2015} = \text{Rs. } 60,000 \times \left( \frac{200}{150} \right) \)
Simplify the fraction:
\( \frac{200}{150} = \frac{20}{15} = \frac{4}{3} \)
Now, complete the calculation:
\( \text{Value of Machinery on 31st Dec 2015} = \text{Rs. } 60,000 \times \frac{4}{3} \)
\( \text{Value of Machinery on 31st Dec 2015} = \text{Rs. } \left( \frac{60,000}{3} \right) \times 4 \)
\( \text{Value of Machinery on 31st Dec 2015} = \text{Rs. } 20,000 \times 4 \)
\( \text{Value of Machinery on 31st Dec 2015} = \text{Rs. } 80,000 \)
Final Result
According to the CPP method, the value of the machinery on 31st December 2015 is Rs. 80,000. This restated value reflects the change in the general price level from the date of purchase to the valuation date.
| Particulars | Amount (Rs.) | Index | Calculation | Restated Value (Rs.) |
|---|---|---|---|---|
| Historical Cost of Machinery | 60,000 | 150 (on 01-01-2015) | \( 60,000 \times \frac{200}{150} \) | 80,000 |
| Restated Value on 31-12-2015 | - | 200 (on 31-12-2015) | - | 80,000 |
Revision Table: Key Concepts in CPP Method
| Concept | Description |
|---|---|
| CPP Method | A system of accounting that adjusts historical costs to reflect changes in the general price level. |
| General Price Index | A measure that shows how the average price of goods and services has changed over time (e.g., Retail Price Index). |
| Restatement | The process of converting historical cost figures to their equivalent value at a current date using a price index. |
| Non-Monetary Items | Assets and liabilities whose values are not fixed in terms of monetary units (e.g., machinery, buildings, inventory). These are restated under CPP. |
| Monetary Items | Assets and liabilities whose values are fixed in terms of monetary units (e.g., cash, debtors, creditors, loans). These are not restated under CPP but lead to 'Gain or Loss on Monetary Items'. |
Additional Information: Purpose of Inflation Accounting
Inflation accounting methods like CPP (Current Purchasing Power) or Current Cost Accounting (CCA) aim to provide a more realistic view of a company's financial position and performance during periods of significant inflation. Historical cost accounting doesn't account for the change in the purchasing power of money, which can distort reported profits and asset values.
The CPP method is relatively simpler than CCA as it only requires a single general price index. However, it assumes that all prices change in line with the general index, which may not always be true for specific assets or industries.
Restating assets using the CPP method helps in:
- Showing assets closer to their current equivalent purchasing power value.
- Calculating depreciation on restated values, potentially providing a better measure of income that can be distributed while maintaining the operating capability of the business.
- Comparing financial results across periods with different price levels.
Important Questions from Basics of Accounting
Assertion (A) : Personal transactions of the owners of the business are not recorded in the books.
Reasoning (R) : According to the business entity concept, each business enterprise is considered as an accounting unit separate from owners.
Match List I with List II.
List I (Accounting Concepts)
List II (Purpose/Applicability)
A.
Going Concern Concept I.
The same accounting method used by a firm from one period to another B.
Consistency II.
Relate to the relative size or importance of an item or event C.
Cost concept III.
This an inappropriate assumption for a firm undergoing bankruptcy D.
Materiality
IV.
The normal basis used to account for assets
Choose the correct answer from the options given below:Which among the following are generally accepted methods of accounting for price level changes?
A. Replacement Cost Method
B. Current Purchasing Power Method
C. Opportunity Cost Method
D. Current Cost Accounting Method
E. Standard Cost Method
Choose the correct answer from the options given below:
Which of the following is/are correct?
I. All permanent accounts are balanced and carried forward to the next accounting period.
II. The temporary accounts are closed at the end of the accounting period.
Total of the two sides of account and to find out the difference is called:
