Depreciation on a Sold and a New Machine
On 1 July 2021 M/s Print Point purchased a printing machine for ₹8,00,000 and spent ₹40,000 on freight and installation. Depreciation is charged at 15% p.a. on the written-down value, and the firm's books are closed on 31 March. On 1 October 2023 the machine was sold for ₹5,20,000. On 1 January 2024 a new machine was purchased for ₹3,00,000. The proprietor's son, who keeps rough notes, has calculated depreciation for 2023-24 by applying 15% to the opening book value for the full year on both machines. He also wants to ignore depreciation on the old machine after 1 October because it was sold. The accountant suspects that both assumptions are wrong but needs figures before advising.
1. Compute depreciation for 2023-24 and the profit or loss on sale of the old machine.
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Installation and freight are capital expenditure, so the cost of the old machine is ₹8,40,000.
| Year | Working | Depreciation ₹ | WDV at 31 March ₹ |
|---|---|---|---|
| 2021-22 | 8,40,000 × 15% × 9/12 | 94,500 | 7,45,500 |
| 2022-23 | 7,45,500 × 15% | 1,11,825 | 6,33,675 |
| 2023-24 (to sale) | 6,33,675 × 15% × 6/12 | 47,526 | 5,86,149 |
Loss on sale = ₹5,20,000 − ₹5,86,149 = ₹66,149.
Depreciation on the new machine = ₹3,00,000 × 15% × 3/12 = ₹11,250.
Total depreciation for 2023-24 = ₹47,526 + ₹11,250 = ₹58,776. Depreciation on the old machine is charged only up to 1 October because it was used until sale; the new machine is depreciated only from 1 January.
2. Quantify the overstatement if full-year depreciation were charged on both machines, and explain the correct treatment.
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Full-year depreciation on the old machine would be ₹6,33,675 × 15% = ₹95,051; on the new machine ₹3,00,000 × 15% = ₹45,000. Total would be ₹1,40,051 instead of ₹58,776, overstating depreciation by ₹81,275 and understating profit by that amount. The correct principle is to charge depreciation for the period the asset is available for use: nine months in the first year, six months in the year of sale, and three months for an asset purchased on 1 January. Ignoring depreciation after sale is also wrong because the old machine was used for six months of 2023-24; sale proceeds must be matched against its written-down value on the date of sale.