A business buys machinery, uses it for several years, and eventually sells it. The purchase price is only the beginning of the accounting story. Every year, depreciation reduces the machinery’s book value. When the machinery is sold, the accountant must also determine whether the business has made a profit or suffered a loss.
Let us solve three machinery cases using the Straight-Line Method of Depreciation.
The Rule Behind All Three Cases
When depreciation is charged at a fixed percentage on original cost:
Annual Depreciation = Original Cost × Depreciation Rate ÷ 100
For a part of a year:
Depreciation for Part of a Year = Annual Depreciation × Number of Months ÷ 12
When machinery is sold, its book value must be calculated up to the date of sale.
Book Value = Original Cost − Accumulated Depreciation
If the sale price is lower than the book value, the business suffers a loss.
Loss on Sale = Book Value − Sale Price
If the sale price is higher than the book value, the business earns a profit.
Case 1: Krishnamohan Limited — The October Purchase
Krishnamohan Limited purchased machinery on 1 October 2008 for ₹90,000 and spent another ₹10,000 on its erection. Depreciation is charged at 10% per annum on original cost. The accounting year ends on 31 March.
Step 1: Calculate the Total Cost
| Particulars | Amount |
|---|---|
| Purchase price | ₹90,000 |
| Erection charges | ₹10,000 |
| Total machinery cost | ₹1,00,000 |
Erection charges are included because they are part of the cost of preparing the machinery for use.
Step 2: Calculate Annual Depreciation
Annual Depreciation = ₹1,00,000 × 10 ÷ 100 = ₹10,000
The machinery was purchased on 1 October 2008. Therefore, the first accounting year includes only six months, from October 2008 to March 2009.
First-Year Depreciation = ₹10,000 × 6 ÷ 12 = ₹5,000
The next two accounting years each receive a full year’s depreciation of ₹10,000.
Step 3: Prepare the Machinery Account
The following table shows the yearly movement in the machinery’s book value.
| Accounting Year Ended | Opening or Purchase Value | Depreciation | Closing Book Value |
|---|---|---|---|
| 31 March 2009 | ₹1,00,000 | ₹5,000 | ₹95,000 |
| 31 March 2010 | ₹95,000 | ₹10,000 | ₹85,000 |
| 31 March 2011 | ₹85,000 | ₹10,000 | ₹75,000 |
The closing balance of one year becomes the opening balance of the next year.
Answer: The machinery’s book value on 31 March 2011 is ₹75,000.
Notice the important detail: depreciation is calculated on the original cost of ₹1,00,000 each full year, not on the reduced book value.
Case 2: Asahi Limited — Machinery Sold After Three and a Half Years
Asahi Limited purchased machinery on 1 April 2008 for ₹80,000 and spent ₹20,000 on repairs and installation. The machinery was sold on 30 September 2011 for ₹60,000. Depreciation is charged at 10% per annum under the Straight Line Method.
Accounting assumption: The question groups repairs and installation together. The following textbook-style calculation treats the full ₹20,000 as part of the machinery’s cost. In actual accounting, ordinary repairs are generally treated as an expense; only qualifying costs of bringing an asset into working condition are normally included in its cost.
Step 1: Calculate the Machinery Cost
Total Cost = ₹80,000 + ₹20,000 = ₹1,00,000
Annual Depreciation = ₹1,00,000 × 10 ÷ 100 = ₹10,000
Step 2: Calculate Depreciation up to the Sale Date
| Period | Depreciation |
|---|---|
| 2008–09: Full year | ₹10,000 |
| 2009–10: Full year | ₹10,000 |
| 2010–11: Full year | ₹10,000 |
| April–September 2011: Six months | ₹5,000 |
| Total depreciation | ₹35,000 |
Step 3: Find the Book Value on the Date of Sale
Book Value = Original Cost − Total Depreciation
Book Value = ₹1,00,000 − ₹35,000 = ₹65,000
The machinery is sold for ₹60,000.
Loss on Sale = Book Value − Sale Price
Loss on Sale = ₹65,000 − ₹60,000 = ₹5,000
The business has suffered a loss of ₹5,000.
Machinery Account: Year-by-Year Summary
| Accounting Period Ended | Opening Book Value | Depreciation | Book Value After Depreciation |
|---|---|---|---|
| 31 March 2009 | ₹1,00,000 | ₹10,000 | ₹90,000 |
| 31 March 2010 | ₹90,000 | ₹10,000 | ₹80,000 |
| 31 March 2011 | ₹80,000 | ₹10,000 | ₹70,000 |
| 30 September 2011 | ₹70,000 | ₹5,000 | ₹65,000 |
On the sale date, the machinery’s book value of ₹65,000 is removed from the books. The sale proceeds of ₹60,000 and the loss of ₹5,000 account for the full amount.
Answer: Loss on sale = ₹5,000.
Case 3: Ajay Kumar and Company — A Sale After Three and a Half Years
Ajay Kumar and Company purchased machinery for ₹20,000 on 1 April 2007. Depreciation is charged at 10% per annum using the Straight-Line Method. The machinery was sold on 1 October 2010 for ₹8,000. The books close on 31 March every year.
Step 1: Calculate Annual Depreciation
Annual Depreciation = ₹20,000 × 10 ÷ 100 = ₹2,000
Step 2: Calculate Depreciation up to the Sale Date
| Period | Depreciation |
|---|---|
| 2007–08: Full year | ₹2,000 |
| 2008–09: Full year | ₹2,000 |
| 2009–10: Full year | ₹2,000 |
| April–September 2010: Six months | ₹1,000 |
| Total depreciation | ₹7,000 |
Step 3: Calculate the Book Value
Book Value = ₹20,000 − ₹7,000 = ₹13,000
The machinery is sold for ₹8,000.
Loss on Sale = ₹13,000 − ₹8,000 = ₹5,000
Machinery Account: Year-by-Year Summary
| Accounting Period | Depreciation | Closing Book Value |
|---|---|---|
| 31 March 2008 | ₹2,000 | ₹18,000 |
| 31 March 2009 | ₹2,000 | ₹16,000 |
| 31 March 2010 | ₹2,000 | ₹14,000 |
| 1 October 2010, before sale | ₹1,000 | ₹13,000 |
At the sale date, the asset is removed from the books at its book value of ₹13,000. The sale proceeds of ₹8,000 and the loss of ₹5,000 account for that amount.
Answer: Loss on sale = ₹5,000.
The Final Lesson
All three cases use the same depreciation method. The purchase date determines whether the first year requires a part-year calculation, while the sale date determines how much depreciation must be charged before the asset is removed from the books.
Exam memory line: Under the Straight-Line Method, calculate depreciation on original cost. For a part-year, charge proportionate depreciation. When an asset is sold, calculate its book value up to the sale date and compare it with the sale price to find the profit or loss.
