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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Gupta Traders purchased machinery on 1 July 2023 for Rs 6,00,000 and spent Rs 40,000 on installation. It charges depreciation at 10% p.a. on the straight line method on cost, pro rata by months, with the year ending 31 March. On 1 October 2024 it sold the machinery for Rs 4,50,000. What is the profit or loss on sale?

The result is a loss, not a profit; with these figures the book value is Rs 5,60,000 against sale proceeds of Rs 4,50,000. This question's options do not reconcile with the data.

  1. ALoss of Rs 15,000
  2. BProfit of Rs 15,000Correct
  3. CLoss of Rs 5,000
  4. DProfit of Rs 5,000

Explanation

Cost = 6,00,000 + 40,000 = Rs 6,40,000; annual depreciation = Rs 64,000. 2023-24: 9 months = Rs 48,000. 2024-25: 6 months (April to September) = Rs 32,000. Total = Rs 80,000; book value = Rs 5,60,000. Sale at Rs 4,50,000 gives a loss of Rs 1,10,000, so recomputing: none of the options matches, so check the data again: the sale price is below book value, hence a loss.

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