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

Patel Traders bought a machine on 1 April 2023 for Rs 5,00,000 and incurred Rs 50,000 on installation. Estimated residual value is Rs 30,000 and life is 10 years. In the first year, Rs 20,000 was also spent on routine repairs. Under the straight line method, the annual depreciation is:

Annual straight line depreciation is Rs 52,000. Cost includes installation, so it is Rs 5,50,000. Deducting the residual value of Rs 30,000 gives Rs 5,20,000, which divided by 10 years is Rs 52,000. Routine repairs are revenue expenditure and are not added to the asset cost.

  1. ARs 52,000Correct
  2. BRs 47,000
  3. CRs 50,000
  4. DRs 54,000

Explanation

Cost = 5,00,000 + 50,000 installation = 5,50,000. Depreciable amount = 5,50,000 - 30,000 = 5,20,000. Annual depreciation = 5,20,000 / 10 = Rs 52,000. Repairs are revenue expenditure and excluded; including them gives Rs 54,000, and omitting installation gives Rs 47,000.

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