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

Sharma Ltd bought a machine on 1 April 2022 for Rs 4,00,000 and charges depreciation at 10% p.a. on the diminishing balance method, with accounts closed on 31 March. On 1 April 2024 the machine is sold for Rs 3,00,000. What is the profit or loss on sale?

There is a loss of Rs 24,000 on sale. After two years of 10% diminishing balance depreciation, the book value is Rs 3,24,000 (4,00,000 less 40,000 less 36,000). The sale price of Rs 3,00,000 is below this, giving the loss.

  1. ALoss of Rs 24,000
  2. BProfit of Rs 24,000Correct
  3. CProfit of Rs 60,000
  4. DLoss of Rs 60,000

Explanation

Year 1 depreciation = 40,000, balance 3,60,000. Year 2 depreciation = 36,000, balance 3,24,000. Sale at 3,00,000 gives a loss of 24,000. Option with profit of 24,000 is wrong because the sale price is below book value, and the straight line figure would give book value 3,20,000 (loss of 20,000) rather than 24,000.

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