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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

A company buys a delivery van for Rs 8,00,000 and charges depreciation at 20% p.a. on the diminishing balance method. What is the depreciation charged for the second year?

The second year depreciation is Rs 1,28,000. In the diminishing balance method the rate applies to the opening book value. After year one's Rs 1,60,000 charge, the book value is Rs 6,40,000, and 20% of that gives Rs 1,28,000.

  1. ARs 1,60,000
  2. BRs 1,28,000Correct
  3. CRs 1,20,000
  4. DRs 1,40,000

Explanation

Year 1 depreciation = 20% of 8,00,000 = Rs 1,60,000, leaving a book value of Rs 6,40,000. Year 2 depreciation = 20% of 6,40,000 = Rs 1,28,000. Rs 1,60,000 wrongly applies the rate on original cost, which is the straight line approach.

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