CA Foundation · Quantitative Aptitude · Mathematics of Finance
Sharma Textiles bought a machine for ₹5,00,000 and depreciates it at 20% per annum on the reducing balance (written down value) method. What is the book value of the machine at the end of the second year?
The book value after two years is ₹3,20,000. Under the reducing balance method, each year's depreciation is 20% of the opening value, so the value is multiplied by 0.8 every year: 5,00,000 x 0.8 x 0.8 = ₹3,20,000. Straight-line depreciation would wrongly give ₹3,00,000.
- A₹3,00,000
- B₹3,20,000Correct
- C₹3,60,000
- D₹4,00,000
Explanation
Value after year 1 = 5,00,000 x 0.8 = ₹4,00,000. Value after year 2 = 4,00,000 x 0.8 = ₹3,20,000. ₹3,00,000 comes from wrongly applying straight-line depreciation of ₹1,00,000 per year on the original cost.
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