CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)
A machine costing ₹2,00,000 is depreciated at 10% per annum on the diminishing balance method. What is the depreciation charge for the second year?
The second-year depreciation is ₹18,000. Under the diminishing balance method the rate is applied to the opening book value, which is ₹1,80,000 after the first year's charge of ₹20,000. Applying 10% to original cost would give ₹20,000, which is incorrect here.
- A₹18,000Correct
- B₹20,000
- C₹16,200
- D₹19,000
Explanation
Year 1 depreciation = 10% of 2,00,000 = ₹20,000, so the book value is ₹1,80,000. Year 2 depreciation = 10% of 1,80,000 = ₹18,000. ₹20,000 is wrong because it applies the rate to original cost, which is the straight line approach.
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