Book value = Cost Price - Total Depreciation provided till the date of sale,
If the selling price is more than the book value, then it is Profit on Sale. If the selling price is less than the book value, it is Loss on Sale.
Let Us now solve a problem to find out the profit or Loss on sale of machinery. Ram manufacturing company purchased on 1st April 2007, Machinery for Rs.2, 00,000. After having used it for three years it was sold for Rs. 160,000. 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.
Book value on the date of sale is Rs. 140,000 As book value is less than selling price the difference is Profit.
= 160,000-140,000
Profit on sale of machinery = Rs. 20,000.
Illustration:
Srinivas & Co. purchased machinery on 1st April 2007 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.
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.
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