Calculation of Profit or Loss on sale of asset :
Some times, a business may dispose an asset when it is worn out. In that case, it is advisable to find the profit or loss on sale of asset. This is done by comparing the selling price with the book value of the asset.
Book value = Cost Price less Total Depreciation provided till the date of sale
If the book value is less than the selling price, then it is Profit on Sale.
If the book value is more than the selling price, it is Loss on Sale.
Illustration :
Ram manufacturing company purchased on 1st April 2002, Machinery for Rs.1,00,000. After having used it for three years it was
sold for Rs. 85,000. Depreciation is to be provided every year at the rate of 10% per annum on the fixed instalment method. Books are
closed on 31st March every year. Find out the profit or loss on sale of machinery.
Calculation of Profit or Loss on Sale of Machinery
| Rs. | |
| Cost Price | 1,00,000 |
| Less: Depreciation for 2002-03 | 10,000 |
| 90,000 | |
| Less: Depreciation for 2003-04 | 10,000 |
| 80,000 | |
| Less: Depreciation for 2004-05 | 10,000 |
| Book value on the date of sale | 70,000 |
Selling price is Rs. 85,000.
Book value on the date of sale is Rs. 70,000
As book value is less than selling price the difference is Profit.
= 85,000 – 70,000
∴ Profit on sale of machinery = Rs. 15,000
Illustration :
Robert & Co. purchased a Machinery on 1st April 2002 for Rs.75,000. After having used it for three years it was sold for Rs.35,000.
Depreciation is to be provided every year at the rate of 10% per annum on Diminishing balance method. Accounts are closed on 31st March every year. Find out the profit or loss on sale of machinery.
Calculation of Profit or Loss on sale of Machinery
| Rs. | |
| Cost Price | 75,000 |
| Less: Depreciation for 2002-03 | 7,500 |
| 67,500 | |
| Less: Depreciation for 2003-04 | 6,750 |
| 60,750 | |
| Less: Depreciation for 2004-05 | 6,070 |
| Book value on the date of sale | 54,675 |
Selling price = Rs. 35,000.
Book value on the date of sale = Rs.54,675.
As book value is greater than selling price the difference is loss.
= 54,675 – 35,000
∴ Loss on sale of Machinery = Rs.19,675.