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

Mehta Industries bought a machine for Rs 6,00,000 on 1 April 2022. Depreciation is charged at 10% p.a. on the straight line method on original cost. From 1 April 2024 the firm changes to the diminishing balance method at 20% p.a. Treating the change prospectively, depreciation for the year ending 31 March 2025 is:

Depreciation for 2024-25 is Rs 96,000. The book value on 1 April 2024 is Rs 4,80,000 after two years of Rs 60,000 depreciation, and the new diminishing balance rate of 20% is applied to that written down value.

  1. ARs 60,000
  2. BRs 1,20,000
  3. CRs 96,000Correct
  4. DRs 1,08,000

Explanation

Book value on 1 April 2024 = 6,00,000 - 2 x 60,000 = 4,80,000. At 20% diminishing balance, depreciation = 96,000. Using the original cost of 6,00,000 gives 1,20,000, which is wrong as the diminishing method applies to the book value.

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