Depreciation on a Lathe Bought Second-Hand and Sold Mid-Year
On 1 October 2022, M/s Ganesh Fabricators purchased a second-hand lathe for ₹6,00,000. It spent ₹40,000 on overhauling the machine and ₹20,000 on installation. The lathe was ready for use on 1 November 2022. The firm estimates a residual value of ₹60,000 and a useful life of five years, and uses the straight-line method. Its books are closed on 31 March every year. The accountant recorded depreciation for 2022-23 for six months on ₹6,00,000 only, arguing that the purchase date should be used and that overhaul and installation are revenue expenses. On 1 January 2025 the lathe was sold for ₹4,20,000. The proprietor wants to know whether the accountant's treatment is acceptable, what depreciation should have been charged, and what profit or loss the sale has produced.
1. Compute the correct depreciation for 2022-23, 2023-24 and 2024-25, and the book value on the date of sale.
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Cost = purchase ₹6,00,000 + overhaul ₹40,000 + installation ₹20,000 = ₹6,60,000. Depreciable amount = ₹6,60,000 − residual ₹60,000 = ₹6,00,000. Annual SLM depreciation = ₹6,00,000 ÷ 5 = ₹1,20,000.
Depreciation begins when the asset is ready for use, i.e. 1 November 2022, not the purchase date.
- 2022-23: 5 months (1 Nov to 31 Mar) = ₹1,20,000 × 5/12 = ₹50,000
- 2023-24: full year = ₹1,20,000
- 2024-25: 9 months (1 Apr to 31 Dec) = ₹1,20,000 × 9/12 = ₹90,000
Book value on sale date = ₹6,60,000 − ₹50,000 − ₹1,20,000 − ₹90,000 = ₹4,00,000.
2. Calculate the profit or loss on sale and explain whether the accountant's argument on overhaul and installation is acceptable.
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Profit on sale = sale proceeds ₹4,20,000 − book value ₹4,00,000 = ₹20,000.
The accountant's view is not acceptable. Overhaul and installation are capital expenditure because they are necessary to bring the lathe to working condition; they form part of the cost of the asset. Depreciation should start from the ready-for-use date, not the purchase date. If the accountant's treatment were followed, 2022-23 depreciation would be only ₹54,000 (6 months on a depreciable amount of ₹5,40,000) and the sale profit would be shown as ₹63,000. That overstates profit by ₹43,000 and understates the asset cost and accumulated depreciation.