The cost of the plant used for the contract is charged. Special types of plants are brought to the site for use, such as cement concrete mixer, crane, tractor, floor polishing machine etc. A clear record may be kept and properly accounted. There are two methods of charging the contract for using the machines.
(1) Contract is debited with the full value of the plant. When a new plant or old plant is issued to a contract, the cost of the plant or book value of the old plant is debited to the contract. The plant is revalued at the end of the year and credited to the contract with revalued (depreciated) value.
This method is good when the plant is put under regular use for the contract for a longer period, in certain cases; the plant gets completely worn out before completion of the work. The depreciated value of the plant is carried forward as the opening balance at the commencement of the next accounting year.
(2) Alternatively, the depreciation calculated on the basis of hourly or daily rate, is debited to the contract. In such case, the value of the plant is not debited to contract. For this, an ‘Upkeep Account’ is to maintained. The cost of running expenses of the plant, repairs, maintenance, oil etc., is debited, a hire rate is fixed with the help of this account and the contract is charged accordingly.
When a portion of the plant is returned to the store, the contract is credited with the depreciated value of that part. If the plant is sold, the full value is debited to the contract and credit must also be given to the contract. When the plant is lost or destroyed, it will be transferred to profit and loss account.
Show how you deal with plant in Contract Account with the following information:
Plant issued to Contract on 1st March costing Rs. 1, 00,000. Plant costing Rs 5,000 was transferred to ‘A’ Contract on 30th August. Plant costing Rs 4,000 was stolen and another costing Rs 3,000 was destroyed by fire.
The plant was insured against fire to the full value. Plant costing Rs 5,000 was sold for Rs 4,000. Plant at the end of December was valued by charging depreciation @ 10% p.a. on 31st December and transferred to ‘B’ Contract Account.