Calculation of profit or loss on sale of machinery
Particulars Rs Cost price 75,000 Less: Depreciation for 2016-17 (75,000 x 10%) 7,500   67,500 Less: Depreciation for 2017-18 (75,000 x 10%) 7,500 Book value on the date of sale 60,000 Less: Selling price 62,000 Profit on sale - 2,000 The selling price is more than the book value on the date of sale of machinery. Hence, the difference Rs.2,000 is profit on sale of machinery.

Calculate the amount of depreciation

Particulars	Amount Rs	Amount Rs
Cost of the Machinery	4,00,000
Add: -Erection charges	15,000
	4,15,000
Add: Freight charges	10,000
Original cost of the Machinery		4,25,000
Ist Year depreciation
\(4,25,000\times{10\over100}\times{3\over 12}=10,625\)
IInd Year depreciation
\(4,25,000\times{10\over 100}=24,500\)

∴ I^st Year depreciation = Rs.10,625
II^st Year depreciation = Rs.42,500
Amount of depreciation on 31.03.2015: Rs. 10,625; on 31.03.2016: Rs. 42,500)

Amount of depreciation = \({(Price\ of\ the\ Asset + Installation\ charges)-Scrap value\over Estimated\ life\ of\ the\ Asset}\)
\(={(38,000+12,000)-6,000\over 4}\)
\(={44,000\over4}=Rs.11,000\)
Rate of Depreciation = \({Amount\ of\ depreciation\over Original\ Cost}\times100\)
\(={11,000\over 50,000}\times100=22\%\)
Amount of depreciation Rs. 11,000; Rate of depreciation 22%)

Merits:
Following are the merits of written down value method.
(a) Equal charge against income: 
(i) In theinitial years depreciatiori is high and repair charges are low.
(ii) Hence, the total burden on profit in respect of depreciation and repairs put together remains almost similar year after year.
(b) Logical method :
(i) In the earlier years, when the asset is more productive, high depreciation is charged.
(ii) In the later years when the asset becomes less productive, the depreciation charge is less.
Limitations :
Following are the limitations of written down value method.
(a) Assets cannot be completely written off:
Under this method, the value of an asset even if it becomes obsolete and useless, cannot be reduced to zero and some balance would continue in the asset account.
(b) Ignores the interest factor:
(i) This method does not take into account the loss of interest on the amount invested in the asset.
(ii) The amount 'would have earned interest, had it been invested outside the business is not considered.
(c) Difficulty in determining the rate of depreciation:
(i) Under this method, the rate of providing depreciation cannot be easily determined
(ii) The rate is generally kept higher because it takes very long time to write off an asset down to its scrap value.
(d) Ignores the actual use of the asset:
(i) Under this method, a fixed rate of depreciation is provided on the written down value of the asset by applying the predetermined rate of depreciation on its original cost.
(ii) But, the actual use of the asset is not considered in the computation of depreciation.

(i) Wear and tear: The normal use of a tangible asset results in physical deterioration which is called wear and tear. When there is wear and tear, the value of the asset decreases proportionately.
(ii) Efflux of time: Certain assets whether used or not become potentially less useful with the passage of time.
(iii) Obsolescence: It is a reduction in the value of assets as a result of the availability of updated alternative assets. This happens due to new inventions and innovations. Though the original asset is in a usable condition, it is not preferred by the users and it loses its value.
(iv) Inadequacy for the purpose: Sometimes, the use of assets may be stopped due to their inadequacy for the purpose. These may become inadequate due to expansion in the capacity of a firm.
(v) Lack of maintenance: A good maintenance will naturally increase the life of the asset. When there is no proper maintenance, there is a possibility of more depreciation.
(vi) Abnormal factors: Decline in the usefulness of fixed asset may be caused by abnormal factors like damage due to fire accidents, natural calamities, etc.