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

Meera Traders buys a machine for Rs 5,00,000 with an estimated useful life of 8 years and an estimated scrap value of Rs 20,000. Under the Straight Line Method, the annual depreciation is:

Annual depreciation is Rs 60,000. Under the Straight Line Method the depreciable amount is cost less scrap value, Rs 4,80,000, spread equally over 8 years. Ignoring the scrap value would wrongly give Rs 62,500.

  1. ARs 62,500
  2. BRs 60,000Correct
  3. CRs 65,000
  4. DRs 57,500

Explanation

SLM depreciation = (Cost - Scrap value) / Life = (5,00,000 - 20,000) / 8 = 4,80,000 / 8 = Rs 60,000. Rs 62,500 results from ignoring scrap value (5,00,000/8).

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