book value of the asset is more than the sale price, the difference is loss. Book value = Cost of the asset – Total depreciation provided upto the date of sale Profit on sale = Sale price – Book value (Sale Price > Book Value) Loss on sale = Book Value – Sale price (Sale Price < Book Value) Illustration Joy and Co. purchased machinery on 1st April for ` , . On 31st March , it sold the machinery for ` , .
Depreciation is to be provided every year at % per annum on the fixed instalment method. Accounts are closed on 31st March every year. Find out the profit or loss on sale of machinery. Solution Calculation of profit or loss on sale of machinery Cost price , Less: Depreciation for - ( , x %) , , Less: Depreciation for - ( , x %) , Book value on the date of sale , Less: Selling price , Profit on sale - , The selling price is more than the book value on the date of sale of machinery.
Hence, the difference ` , is profit on sale of machinery. Student activity Think: Will the method of depreciation affect the profit or loss made on the sale of an asset? Accountancy Illustration On 1st April , Kumar purchased a machine for ` , and spent ` , on its installation. The residual value at the end of its expected useful life of years is estimated at ` , .
On 30th September , the machine is sold for ` , . Depreciation is to be provided according to straight line method. Prepare Machinery Account. Accounts are closed on 31st December every year.
Solution Amount of depreciation = Original cost of the asset – Estimated scrap value Estimated life of the asset in years = , , , − = ` , per year Rate of depreciation per year = Amount of depreciation per year Original cost × = ,