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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Mehta Traders buys a machine for ₹8,00,000 on 1 April. Its present replacement cost on 31 March is ₹9,50,000 and its estimated net realisable value is ₹6,00,000. Annual depreciation is ₹80,000 and it was used for one year. The company reports it at ₹7,20,000 in its balance sheet. Which measurement basis is the company using?

The company is using historical cost less accumulated depreciation. The original cost of ₹8,00,000 minus one year's depreciation of ₹80,000 equals the reported ₹7,20,000, whereas current cost would give ₹9,50,000 and realisable value ₹6,00,000.

  1. AHistorical cost, less accumulated depreciationCorrect
  2. BCurrent cost
  3. CRealisable value
  4. DPresent value

Explanation

Cost 8,00,000 less one year's depreciation 80,000 gives 7,20,000, which matches the reported figure. Current cost would be 9,50,000 and realisable value 6,00,000, so those do not match. Hence the basis is historical cost less depreciation.

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