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CA Foundation · Accounting · Depreciation and Amortisation

Mehta & Sons buys a machine for ₹1,00,000 and uses the annuity method. The annual depreciation instalment is ₹26,000 and interest at 5% is charged on the opening book value. What is the book value of the machine at the end of year 1, assuming the interest is credited to the asset account?

The book value is ₹79,000. Under the annuity method, interest of ₹5,000 (5% of ₹1,00,000) is added to the asset account, and the annual depreciation of ₹26,000 is then deducted, so the closing balance is 1,00,000 + 5,000 - 26,000.

  1. A₹79,000Correct
  2. B₹74,000
  3. C₹84,000
  4. D₹69,000

Explanation

Interest for year 1 = 5% of 1,00,000 = ₹5,000, which is debited to the asset account. Book value = 1,00,000 + 5,000 - 26,000 = ₹79,000. Option ₹74,000 results from deducting the interest instead of adding it, which is the wrong sign.

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