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

Sharma Industries bought a machine on 1 April 2023 for Rs 3,00,000 and spent Rs 20,000 on its installation. Its life is 10 years with no residual value. Depreciation is charged at straight line. What is the book value of the machine on 31 March 2026?

The book value is Rs 2,24,000. Installation cost is capitalised, so cost is Rs 3,20,000 and yearly depreciation is Rs 32,000. After three years, accumulated depreciation is Rs 96,000, leaving Rs 2,24,000. Leaving out installation charges would understate the asset's cost and book value.

  1. ARs 2,10,000
  2. BRs 2,24,000Correct
  3. CRs 2,30,000
  4. DRs 2,25,000

Explanation

Cost includes installation: 3,00,000 + 20,000 = 3,20,000. Annual depreciation = 32,000. For 3 years = 96,000. Book value = 3,20,000 - 96,000 = Rs 2,24,000. Excluding installation gives Rs 2,10,000, which is wrong.

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