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

Mehta Industries has a machine with an original cost of Rs 2,00,000, bought on 1 April 2021, depreciated at 10% on straight line basis on original cost. On 1 April 2023 it sells the machine for Rs 1,50,000. What is the result on sale?

The sale results in a loss of Rs 10,000. Two years of straight line depreciation at Rs 20,000 a year reduces the book value from Rs 2,00,000 to Rs 1,60,000. Selling at Rs 1,50,000 is below the book value, so the shortfall is a loss.

  1. ALoss of Rs 10,000
  2. BProfit of Rs 10,000Correct
  3. CProfit of Rs 50,000
  4. DLoss of Rs 30,000

Explanation

Annual depreciation = 10% of 2,00,000 = Rs 20,000. For two years = Rs 40,000, so book value = 1,60,000. Sale price 1,50,000 is below book value, giving a loss of Rs 10,000. Wait: 1,60,000 - 1,50,000 = 10,000 loss, so the profit option is wrong.

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