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Resale of yearly-depreciated machine within a year
01-29-2011, 07:36 AM,
 Farkhanda Junior Member Posts: 8 Threads: 7 Joined: Oct 2009 Reputation: 0
Resale of yearly-depreciated machine within a year
An equipment purchased for Rs. 1,200,000 (with no resale value and life of 5 years) on Jan 1 2010 for the purpose of contract-based production. The equipment is depreciated by a straight line method. (It is not mentioned in the question whether the company uses annual or monthly depreciation).
After three months, the contract was cancelled for some reasons. Company decided to sale its equipment and some other company purchased it at Rs. 500,000 at April 1, 2010.
Now how we should treat such Loss where equipment is being sold in less than 1 year. Whether the loss on sale would be 5 lacs - 12 lacs = 7 lacs (as annual depreciation is charged at the end of year and since there has been four months now, so no depreciation would be charged)?
Or should this calculation account for accumulated depreciation of 1st year. In this case the book value will be (12 lacs - 2.4 lacs = 9.6 lacs) and then the loss on sale would be 5 lacs - 8 lacs = 4.6 lacs.

Or the accumulated depreciation should be calculated for just three months i.e. accumulated dep. is (monthly dep 20000 x 3 = 60000)
Book value will be 1200000 - 60000 = 1140000 and Loss on sale would be 500,000 - 1140000 = 640,000?

Note that it is not mentioned in the question that whether the company charges on monthly or annual based depreciation...

Please sort out the right method...that's really confusing me...
01-29-2011, 01:46 PM,
 Kasim Posting Freak Posts: 1,102 Threads: 145 Joined: Jan 2010 Reputation: 0

Read IAS16 for once and get rid of such confusions for ever
01-29-2011, 10:38 PM,
 Dard Posting Freak Posts: 876 Threads: 23 Joined: Jan 2010 Reputation: 0

Companies normally have 3 types of policies for the depreciation charge;
(1). Full year depreciation in the year of purchase and no depreciation charged in the year of disposal,
(2). Vice versa of (1).
(3). Time apportionment basis
In the given scenario, year of purchase and disposal is same. Therefore, if either of the policy (1) and (2) is followed, no depreciation is charged. However, in the scenario, the time-apportionment basis gives a more fairer representation of the usage of the Machinery. It has been used for few months and is therefore not as good as a new machine
This is my understanding(i am not a professional)
01-30-2011, 04:40 AM,
 Schuaeb Posting Freak Posts: 1,052 Threads: 27 Joined: Jun 2006 Reputation: 0

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Farkhanda</i>
<br />An equipment purchased for Rs. 1,200,000 (with no resale value and life of 5 years) on Jan 1 2010 for the purpose of contract-based production. The equipment is depreciated by a straight line method. (It is not mentioned in the question whether the company uses annual or monthly depreciation).
After three months, the contract was cancelled for some reasons. Company decided to sale its equipment and some other company purchased it at Rs. 500,000 at April 1, 2010.
Now how we should treat such Loss where equipment is being sold in less than 1 year. Whether the loss on sale would be 5 lacs - 12 lacs = 7 lacs (as annual depreciation is charged at the end of year and since there has been four months now, so no depreciation would be charged)?
Or should this calculation account for accumulated depreciation of 1st year. In this case the book value will be (12 lacs - 2.4 lacs = 9.6 lacs) and then the loss on sale would be 5 lacs - 8 lacs = 4.6 lacs.

Or the accumulated depreciation should be calculated for just three months i.e. accumulated dep. is (monthly dep 20000 x 3 = 60000)
Book value will be 1200000 - 60000 = 1140000 and Loss on sale would be 500,000 - 1140000 = 640,000?

Note that it is not mentioned in the question that whether the company charges on monthly or annual based depreciation...

Please sort out the right method...that's really confusing me...
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

The revision in IAS 16 requires depreciation to be charged on proportionate basis either on the basis of months or days. If depreciation is charged on the basis of the number of months for which the asset is used it may be the company's choice to charge full depreciation for the month in which it was purchased or for the month in which it was disposed. In the scenario provided depreciation for three months will be charged while calculating the loss on disposal.

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