Question

ABC Ltd. has Machinery written down value of which on 1st April, 2024 was Rs 8,60,000 and on 31st March, 2025 was Rs 9,50,000. Depreciation for the year was Rs 40,000. In the beginning of the year, a part of machinery was sold for Rs 25,000, which had a written down value of Rs 20,000. Calculate Cash Flow from Investing Activities.

• A. Rs 1,25,000
• B. Rs 1,25,000
• C. Rs 2,50,000
• D. Rs 2,50,000

Hint:

To quickly find purchases of any asset at WDV:
\[ \text{Purchases} = \text{Closing WDV} + \text{Depreciation} + \text{WDV of Asset Sold} - \text{Opening WDV} \]
Applying the formula:
\[ \text{Purchases} = 9,50,000 + 40,000 + 20,000 - 8,60,000 = 1,50,000 \]
Net Cash Flow from Investing = $\text{Sale Price} - \text{Purchase Price} = 25,000 - 1,50,000 = (1,25,000)$.
This avoids having to draw out the full ledger account during the exam!

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks us to find the Net Cash Flow from Investing Activities. This requires us to analyze the purchases and sales of machinery during the financial year using a Machinery Account ledger.

Step 2: Key Formula or Approach:
We will construct the Machinery Account (at Written Down Value) to find the missing figure, which represents the purchase of new machinery during the year.

Step 3: Detailed Explanation:

• Analyze the Transactions and WDV changes:
  Opening Balance (1st April, 2024) = Rs 8,60,000
  Closing Balance (31st March, 2025) = Rs 9,50,000
  Depreciation during the year = Rs 40,000
  Sale of Machinery = Rs 25,000 (having WDV of Rs 20,000)
  Gain on Sale of Machinery = Sale Value - WDV = \( 25,000 - 20,000 = Rs 5,000 \).
  
• Construct Machinery Account (to find Purchase of Machinery):
  Let's draft the ledger entries:
  Debit Side:
  - To Balance b/d (Opening): Rs 8,60,000
  - To Gain on Sale of Machinery: Rs 5,000
  - To Bank A/c (Purchase - Balancing Figure)
  Credit Side:
  - By Depreciation A/c: Rs 40,000
  - By Bank A/c (Sale of machinery): Rs 25,000
  - By Balance c/d (Closing): Rs 9,50,000
  
• Calculate the Balancing Figure (Purchase of Machinery):
  \[ \text{Total Credit Side} = 40,000 + 25,000 + 9,50,000 = Rs 10,15,000 \]
  \[ \text{Total Debit Side (excluding purchases)} = 8,60,000 + 5,000 = Rs 8,65,000 \]
  \[ \text{Purchase of Machinery (Balancing Figure)} = 10,15,000 - 8,65,000 = Rs 1,50,000 \]
  Since this is a purchase, it represents a cash outflow of Rs 1,50,000.
  
• Calculate Cash Flow from Investing Activities:
  \[ \text{Inflow from Sale of Machinery} = + Rs 25,000 \]
  \[ \text{Outflow for Purchase of Machinery} = - Rs 1,50,000 \]
  \[ \text{Net Cash Flow from Investing Activities} = 25,000 - 1,50,000 = - Rs 1,25,000 \]
  An outflow is represented inside brackets as Rs (1,25,000).
  

Step 4: Final Answer:
The net cash flow from investing activities is an outflow of Rs 1,25,000, represented as Rs (1,25,000), which corresponds to Option (B).