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

A firm's asset has a book value of Rs 81,000 at the end of year 2, after depreciation at a fixed percentage on diminishing balance. Its cost was Rs 1,00,000. What is the rate of depreciation?

The rate is 10%. With cost Rs 1,00,000 and book value Rs 81,000 after two years, (1 − r) squared equals 0.81, so 1 − r is 0.9. Check: 10% depreciation gives Rs 90,000 after year one and Rs 81,000 after year two.

  1. A10%Correct
  2. B9.5%
  3. C15%
  4. D20%

Explanation

Book value after 2 years = 1,00,000 × (1 − r)². So (1 − r)² = 0.81 and 1 − r = 0.9, giving r = 10%. Check: 90,000 then 81,000. Rate 9.5% is wrongly 19% halved.

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