CA Foundation · Accounting · Depreciation and Amortisation
Kapoor Industries bought machinery on 1 April 2021 for ₹4,00,000 and charges depreciation at 10% per annum on original cost (straight-line), pro rata by month. On 1 October 2023 it sold the machinery for ₹2,50,000. The books close on 31 March each year. What is the result of the sale?
The sale results in a loss of ₹50,000. Depreciation runs for 2.5 years at ₹40,000 a year, totalling ₹1,00,000, so the book value at sale is ₹3,00,000. The sale price of ₹2,50,000 is lower than this. Leaving out the part-year depreciation gives a wrong loss of ₹70,000.
- ALoss of ₹50,000Correct
- BLoss of ₹70,000
- CLoss of ₹30,000
- DProfit of ₹50,000
Explanation
Annual depreciation is 10% of 4,00,000 = 40,000. From 1 April 2021 to 30 September 2023 is 2.5 years, so accumulated depreciation = 1,00,000. Book value at sale = 3,00,000. Sale price 2,50,000 gives a loss of ₹50,000. A loss of ₹70,000 results if the six months' depreciation for the year of sale is omitted.
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