CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest
A machine costing Rs 5,00,000 depreciates at 20% per annum on the reducing balance (diminishing value) method. What is its book value at the end of 2 years?
The book value is Rs 3,20,000. Under the reducing balance method, the value after the first year is Rs 4,00,000 and after the second year is 80% of that, Rs 3,20,000. Straight-line depreciation would wrongly give Rs 3,00,000.
- ARs 3,00,000
- BRs 3,20,000Correct
- CRs 3,50,000
- DRs 4,00,000
Explanation
Book value = 5,00,000 x (0.8)^2 = 5,00,000 x 0.64 = Rs 3,20,000. Check: year 1 value 4,00,000; year 2 value 4,00,000 x 0.8 = 3,20,000. Rs 3,00,000 results from straight-line 20% on the original cost for 2 years, which is the wrong method.
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