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CA Foundation · Accounting · Depreciation and Amortisation

Under the straight-line method, an asset costing ₹1,20,000 with a scrap value of ₹20,000 and a life of 10 years is used for 4 years and then sold for ₹70,000 at the end of year 4. What is the profit or loss on sale?

There is a loss of ₹10,000 on sale. Yearly depreciation is ₹10,000, so four years' depreciation is ₹40,000 and book value is ₹80,000. Selling at ₹70,000 is ₹10,000 below book value, which is a loss.

  1. AProfit of ₹10,000Correct
  2. BLoss of ₹10,000
  3. CLoss of ₹30,000
  4. DProfit of ₹30,000

Explanation

Annual depreciation is (1,20,000 - 20,000)/10 = ₹10,000. After 4 years accumulated depreciation is ₹40,000, so book value is ₹80,000. Sale price ₹70,000 is below ₹80,000, so there is a loss of ₹10,000. Reporting a profit would wrongly compare with cost less scrap only.

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