Question

cost of machinery 2,00,000 rate of depreciation 10% p.a sold the machinery after using 3 years for rs 50,000 calculate profit and loss on sale of the asset
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Answer 1

ANSWER :

• ✎ If a machinery costing Rs. 2,00,000; charging depreciation @10% p.a issold after using 3 years for Rs. 50,000; then Loss on sale of the machinery is Rs. 90,000 (when depreciation is charged under Straight Line Method)

• ✎ If a machinery costing Rs. 2,00,000; charging depreciation @10% p.a issold after using 3 years for Rs. 50,000; then Loss on sale of the machinery is Rs. 95,800 (when depreciation is charged under Written Down Value Method)

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SOLUTION :

❒ Given :-

• Cost of the Machinery = Rs. 2,00,000

• Number of years = 3 years

• Rate of Depreciation = 10% p.a.

• Selling Price = Rs. 50,000

❒ To Calculate :-

• Profit or Loss on sale of the Machinery = ?

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❒ Note :-

• ➻ In the question, the method of charging depreciation is not mentioned. There are two commonly use methods of charging depreciation, i.e., Straight Line Method and Written Down Value Method.

• ➻ Thus, we will calculate depreciation under both methods and on the basis of this, we will calculate the profit or loss on the sale of Machinery.

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❒ Case 1 : When Depreciation is charged under Straight Line Method :-

• ❍ Calculation of Amount of Depreciation :

Here,

• Cost of the Machinery = Rs. 2,00,000

• Rate of Depreciation = 10% p.a.

∴ Amount of Depreciation = Rs. (2,00,000 × $\sf{\dfrac{10}{100}}$ )

➨ Amount of Depreciation = Rs. 20,000

Hence, Depreciation to be charged per year is Rs. 20,000

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• ❍ Calculation of the value of the Machinery after 3 years :

Here,

• Cost of the Machinery = Rs. 2,00,000

Less : Depreciation for the first year = Rs. 20,000

• Value of the Machinery after 1 year = Rs. 1,80,000

Less : Depreciation for the second year = Rs. 20,000

• Value of the Machinery after 2 years = Rs. 1,60,000

Less : Depreciation for the third year = Rs. 20,000

• Value of the Machinery after 3 years = Rs. 1,40,000

Hence, the value of the Machinery after 3 years is Rs. 1,40,000.

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• ❍ Calculation of Profit or Loss on sale of Machinery :

Here,

• Value of the Machinery after 3 years = Rs. 1,40,000

• Selling Price of the Machinery = Rs. 50,000

As the selling price is less than the value of Machinery after 3 year, there is a loss on sale of the Machinery.

• ★ Amount of Loss on sale = Value of the Machinery after 3 years - Selling Price of the Machinery

➜ Amount of Loss on sale = Rs. 1,40,000 - Rs. 50,000

∴ Amount of Loss on sale = Rs. 90,000

• So, the amount of loss on sale of the Machinery after 3 years is Rs. 90,000.

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❒ Case 2 : When Depreciation is charged under Written Down Value Method :-

• ❍ Calculation of the value of the Machinery after 3 years :

Here,

• Cost of the Machinery = Rs. 2,00,000

• Rate of Depreciation = 10% p.a.

Now,

• Cost of Machinery = Rs. 2,00,000

Less : Depreciation @10% p.a. for the first year = Rs. 20,000

• Value of the Machinery after 1 year = Rs. 1,80,000

Less : Depreciation @10% p.a. for the second year = 18,000

• Value of the Machinery after 2 years = Rs. 1,62,000

Less : Depreciation @10% p.a. for the third year = Rs. 16,200

• Value of the Machinery after 3 years = 1,45,800

Hence, the value of the Machinery after 3 years is Rs. 1,45,800.

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• ❍ Calculation of Profit or Loss on sale of Machinery :

Here,

• Value of the Machinery after 3 years = Rs. 1,45,800

• Selling Price of the Machinery = Rs. 50,000

As the selling price is less than the value of Machinery after 3 year, there is a loss on sale of the Machinery.

• ★ Amount of Loss on sale = Value of the Machinery after 3 years - Selling Price of the Machinery

➜ Amount of Loss on sale = Rs. 1,45,800 - Rs. 50,000

∴ Amount of Loss on sale = Rs. 95,800

• So, the amount of loss on sale of the Machinery after 3 years is Rs. 95,800.