The cost of an asset on 01-01-2002 is 5,00,000 and its life is 10 years with salvage value is zero. If it is sold on 31-12-2008 for 50,000 than calculate the net profit/loss realized

Solution

We first need to calculate the depreciated value of the asset at 31-12-2008 and compare it with the sale price to calculate the profit or loss realized. Depreciation is to be considered for 7 years (i.e. 2002 to 2008). Step 1 – calculating per year depreciation assuming, straight line method Depreciation per year = (cost-salvage value) /number of yrs = (5,00,000 – 0)/10 = 50,000 per year Step 2 – calculating depreciated value of the asset So depreciation of 7 years = 50000*7 = 3,50,000 As such, the written down value at end of 7th year = cost – depreciation for 7 years = 5,00,000 – 3,50,000 = 1,50,000 Step 3 – calculating the profit/loss Profit = sale price - depreciated value = 50,000-1,50,000 = Net loss of 1,00,000