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CMA Intermediate · Financial Accounting · Hire Purchase and Installment Sale Transactions

A hirer buys a machine on hire purchase with cash price Rs 1,50,000 and charges depreciation at 20% p.a. on the written down value. The asset is recorded at cash price. What is the depreciation for the second year?

Second-year depreciation is Rs 24,000. The asset is recorded at its cash price of Rs 1,50,000; first-year depreciation at 20% is Rs 30,000, leaving a written down value of Rs 1,20,000, and 20% of that gives Rs 24,000.

  1. ARs 30,000
  2. BRs 24,000Correct
  3. CRs 20,000
  4. DRs 36,000

Explanation

Year 1 depreciation = 20% of 1,50,000 = 30,000, so WDV = 1,20,000. Year 2 depreciation = 20% of 1,20,000 = 24,000. Rs 30,000 is wrong because it applies the rate on original cost, which is the straight-line method.

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