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

Rao Industries bought machinery on 1 April 2022 for ₹5,00,000 and depreciates it at 20% p.a. on the diminishing balance method. On 1 April 2024 the machine was sold for ₹3,00,000. What is the profit or loss on sale?

The sale results in a loss of ₹20,000. Two years of 20% diminishing balance depreciation reduce the machine from ₹5,00,000 to ₹3,20,000. Since it was sold for ₹3,00,000, which is less than the book value, the difference is a loss.

  1. ALoss of ₹20,000
  2. BProfit of ₹20,000Correct
  3. CProfit of ₹1,00,000
  4. DLoss of ₹1,00,000

Explanation

After year 1 WDV = 5,00,000 − 1,00,000 = 4,00,000. After year 2 depreciation of 80,000, WDV = 3,20,000 on 1 April 2024. Sale price 3,00,000 is below book value 3,20,000, giving a loss of ₹20,000. Hence the profit option is wrong in sign.

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