Q.A firm purchased a machine on 1st April 2021 for ₹80,000 and charges depreciation at 10% per annum on original cost under the Straight Line Method, debiting depreciation directly to the Machinery Account. On 1st April 2023, the machine was sold for ₹60,000. Calculate the profit or loss on sale, pass the necessary journal entries, and prepare the Machinery Account for 2021-22, 2022-23 and 2023-24.

Because the machine was sold right at the start of a year, its book value on the sale date is simply the previous year's closing balance. …

Step 1 — Depreciation and book value each year. Annual depreciation = 10% of 80,000 = ₹8,000.

• 2021-22: Opening 80,000 − Depreciation 8,000 = Closing 72,000.
• 2022-23: Opening 72,000 − Depreciation 8,000 = Closing 64,000.

Step 2 — Book value on the date of sale. The machine was sold on 1st April 2023, which is the very first day of 2023-24 — the same date as the opening balance of that year — so no further depreciation needs to be charged before comparing. Book value on the date of sale = ₹64,000.

Step 3 — Profit or loss on sale.

Profit/(Loss) = Sale Proceeds − Book Value = 60,000 − 64,000 = −₹4,000, i.e., a Loss on Sale of ₹4,000.

Step 4 — Journal entries.

2023 Apr 1: Bank A/c ...Dr 60,000

Loss on Sale of Machinery A/c ...Dr 4,000

To Machinery A/c 64,000

(Being machine sold at a loss of ₹4,000)

2023 Apr 1: Profit and Loss A/c ...Dr 4,000

To Loss on Sale of Machinery A/c 4,000

(Being loss on sale transferred to Profit and Loss Account)

Step 5 — Machinery Account.

2021-22:

2022-23:

| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |

|---|---|---|---|---|---| …

Charging an extra year's depreciation for 2023-24 even though the machine was sold on the very first day of that year (no time had elapsed to depreciate); computing profit/lo …