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

Rao Ltd. bought a machine on 1 April 2021 for ₹3,00,000 and depreciates it at 20% p.a. on diminishing balance. On 1 April 2023 it sold the machine for ₹2,00,000. What is the profit or loss on sale?

There is a profit of ₹8,000 on sale. Two years of 20% diminishing balance depreciation reduce ₹3,00,000 to ₹2,40,000 and then ₹1,92,000. Selling at ₹2,00,000 exceeds this book value by ₹8,000, so a profit arises, not a loss.

  1. ALoss of ₹8,000
  2. BProfit of ₹8,000Correct
  3. CProfit of ₹20,000
  4. DLoss of ₹40,000

Explanation

Year 1 depreciation = 60,000, leaving 2,40,000. Year 2 depreciation = 48,000, leaving 1,92,000 as book value on 1 April 2023. Sale price 2,00,000 minus 1,92,000 = profit of ₹8,000. A loss of ₹40,000 would come from comparing the sale price with the 2,40,000 balance after one year only.

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