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

Mehta Industries bought a machine on 1 April 2021 for Rs 5,00,000. It charges depreciation at 20% on diminishing balance. On 1 April 2023 the machine was sold for Rs 3,00,000. What is the profit or loss on sale?

There is a loss of Rs 20,000 on sale. The book value at the sale date is Rs 3,20,000 after depreciation of Rs 1,00,000 and Rs 80,000 in two years, and the machine was sold for Rs 3,00,000, which is less than book value.

  1. ALoss of Rs 20,000
  2. BProfit of Rs 20,000Correct
  3. CLoss of Rs 2,00,000
  4. DProfit of Rs 1,00,000

Explanation

Year 1 depreciation = 1,00,000, WDV = 4,00,000. Year 2 depreciation = 80,000, WDV = 3,20,000 on 31 March 2023. Sale value 3,00,000 is below 3,20,000, so there is a loss of 20,000. The loss option, not profit, is correct.

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