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4. X Ltd. has entered into a binding agreement with Beta Ltd. to buy a custom­ made machine for ` 2 lakhs. During the year 2024-25 X Ltd has to change its method of production due to changes in market trend. Before the delivery of the machine, X Ltd had already changed its method of production and the new method will not require the machine ordered. Now the company decides to scrap it after delivery. The expected scrap value is ` 25,000. Machine was received on 10th October, 2024 and was scrapped on 15th October, 2024. The correct accounting treatment for above machine in the year 2024-25 is -

Options

AMachine A/c to be debited with ` 2 lakhs and Bank A/c to be credited with ` 2 lakhs.
BImpairment A/c to be debited with ` 1.75 lakhs and Bank A/c to be credited with ` 1.75 lakhs.
CProfit and Loss A/c to be debited with ` 2 lakhs and Bank A/c to be credited with ` 2 lakhs.
DProfit and Loss A/c to be debited with ` 1.75 lakhs and Bank A/c to be credited with ` 1.75 lakhs. ADVANCED ACCOUNTING
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Correct Answer

✅ Option D — Profit and Loss A/c to be debited with ` 1.75 lakhs and Bank A/c to be credited with ` 1.75 lakhs. ADVANCED ACCOUNTING

All Options:

  • AMachine A/c to be debited with ` 2 lakhs and Bank A/c to be credited with ` 2 lakhs.
  • BImpairment A/c to be debited with ` 1.75 lakhs and Bank A/c to be credited with ` 1.75 lakhs.
  • CProfit and Loss A/c to be debited with ` 2 lakhs and Bank A/c to be credited with ` 2 lakhs.
  • DProfit and Loss A/c to be debited with ` 1.75 lakhs and Bank A/c to be credited with ` 1.75 lakhs. ADVANCED ACCOUNTING ✓

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Detailed Solution & Explanation

To determine the correct accounting treatment for the custom-made machine:
1. X Ltd. has entered into a binding agreement to buy a custom-made machine for ‘ 2\displaystyle `\,2 lakhs.
2. Before delivery, the company changed its production method and decided to scrap the machine after delivery.
3. Expected scrap value = ‘ 25,000\displaystyle `\,25,000.
4. Since the agreement is binding, the outflow is unavoidable. The net loss is:
Net Loss=‘ 2,00,000−‘ 25,000=‘ 1,75,000\text{Net Loss} = `\,2,00,000 - `\,25,000 = `\,1,75,000This net loss must be charged to the Profit and Loss Account immediately, and the Bank A/c will be credited with the net amount of ‘ 1,75,000\displaystyle `\,1,75,000 (representing the net cash outflow).
Hence, **Option D** is the correct answer.

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