CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)
Mehta Traders bought a machine on 1 April 2023 for ₹2,00,000 and charges depreciation at 10% per annum on the diminishing balance method. The accounting year ends on 31 March. What is the depreciation charged for the year ending 31 March 2025?
The depreciation for the second year is ₹18,000. Under the diminishing balance method the rate applies to the opening book value, which is ₹1,80,000 after the first year's depreciation of ₹20,000, so 10% of that gives ₹18,000.
- A₹20,000
- B₹18,000Correct
- C₹16,200
- D₹36,000
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. The figure of ₹20,000 wrongly applies the rate to original cost, as in the straight line method.
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