A machine costs Rs. 1,20,000. Its useful life is 10 years and its scrap value is Rs. 20,000. It is depreciated by the straight line method and is sold at the end of the 6th year for Rs. 70,000. Which of the following statements are correct?
(A) The annual depreciation is Rs. 10,000.
(B) The book value of the machine at the end of the 6th year is Rs. 60,000.
(C) The machine is sold at a loss of Rs. 10,000.
(D) The rate of depreciation is 10% of the cost.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) and (B) only
By the straight line method,
\( \displaystyle D = \frac{C - S}{n} = \frac{120000 - 20000}{10} = 10000 \)
The book value at the end of the 6th year is
\( 120000 - 6 \times 10000 = 60000 \)
The machine is sold for Rs. 70,000, which is more than its book value:
\( 70000 - 60000 = 10000 \)
The rate of depreciation on cost is
\( \displaystyle \frac{10000}{120000} \times 100 = 8.33\% \)
So the annual depreciation is Rs. 10,000, the book value after 6 years is Rs. 60,000, the sale gives a profit of Rs. 10,000 and the rate is 8.33% of the cost.
Checking the statements
(A) The annual depreciation is Rs. 10,000. — Correct. (1,20,000 − 20,000) ÷ 10 = 10,000.
(B) The book value of the machine at the end of the 6th year is Rs. 60,000. — Correct. 1,20,000 − 60,000 = 60,000.
(C) The machine is sold at a loss of Rs. 10,000. — Incorrect. It is sold for Rs. 10,000 more than its book value, which is a profit.
(D) The rate of depreciation is 10% of the cost. — Incorrect. 10,000 ÷ 1,20,000 = 8.33%; 10% would be of the cost minus scrap.