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

A firm's machine costing Rs 1,00,000 is depreciated at 10% per annum on the diminishing balance method. The book value at the end of the second year is:

The book value at the end of year two is Rs 81,000. Year one depreciation is Rs 10,000, leaving Rs 90,000. Year two depreciation is 10 percent of this reduced balance, Rs 9,000, leaving Rs 81,000. Charging Rs 10,000 each year on original cost would wrongly give Rs 80,000.

  1. ARs 81,000Correct
  2. BRs 80,000
  3. CRs 90,000
  4. DRs 79,000

Explanation

Year 1 depreciation = 10% of 1,00,000 = 10,000, leaving 90,000. Year 2 depreciation = 10% of 90,000 = 9,000, leaving 81,000. Rs 80,000 results from wrongly using straight line on original cost.

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