AB Bros. purchased a fixed asset for ₹87,000 which is expected to last for seven years. Depreciation is calculated using the straight line method. The scrap value of the asset is ₹3,000. 1. How will the asset be shown in the balance sheet after the end of the 3rd year? 2. Calculate the amount of profit or loss on sale if: (a) The asset is sold for ₹45,000 at the end of the 4th year. (b) The asset is sold for ₹25,000 at the end of the 5th year.
Answer (1)
To tackle the problems presented, let's follow a clear step-by-step approach:
Depreciation Calculation:
Using the straight-line method, the annual depreciation for the asset can be calculated as follows:
Annual Depreciation = Useful Life Cost of Asset − Scrap Value
Given:
Cost of Asset = ₹87,000
Scrap Value = ₹3,000
Useful Life = 7 years
Annual Depreciation = 7 87 , 000 − 3 , 000 = 7 84 , 000 = ₹12 , 000
Asset Value at the End of the 3rd Year:
To find the value of the asset at the end of the 3rd year, multiply the annual depreciation by 3 and subtract it from the original cost:
Accumulated Depreciation = 12 , 000 × 3 = ₹36 , 000 Book Value after 3 years = 87 , 000 − 36 , 000 = ₹51 , 000
Calculation of Profit or Loss on Sale:
(a) If the asset is sold for ₹45,000 at the end of the 4th year.
First, calculate the book value at the end of the 4th year:
Accumulated Depreciation for 4 years = 12 , 000 × 4 = ₹48 , 000 Book Value after 4 years = 87 , 000 − 48 , 000 = ₹39 , 000
Profit/Loss on Sale: Profit = 45 , 000 − 39 , 000 = ₹6 , 000
Therefore, there is a profit of ₹6,000.
(b) If the asset is sold for ₹25,000 at the end of the 5th year.
First, calculate the book value at the end of the 5th year:
Accumulated Depreciation for 5 years = 12 , 000 × 5 = ₹60 , 000 Book Value after 5 years = 87 , 000 − 60 , 000 = ₹27 , 000
Loss on Sale: Loss = 27 , 000 − 25 , 000 = ₹2 , 000
Therefore, there is a loss of ₹2,000.
By following these steps, we accurately determine the asset's book value after the 3rd year and calculate any profit or loss on sale at the specified periods.
