Skip to content

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

Sharma Traders buys machinery for Rs 5,00,000 and spends Rs 40,000 on freight and Rs 60,000 on installation. Estimated scrap value is Rs 50,000 and useful life is 10 years. Annual depreciation under the straight line method is:

Annual depreciation is Rs 55,000. The cost of the machinery includes freight and installation, giving Rs 6,00,000. Deducting scrap value of Rs 50,000 leaves a depreciable amount of Rs 5,50,000, which is spread evenly over the ten year useful life.

  1. ARs 50,000
  2. BRs 55,000Correct
  3. CRs 60,000
  4. DRs 65,000

Explanation

Cost = 5,00,000 + 40,000 + 60,000 = 6,00,000. Depreciable amount = 6,00,000 - 50,000 = 5,50,000. Divided by 10 years gives Rs 55,000. Rs 50,000 wrongly ignores freight and installation, and Rs 60,000 wrongly ignores scrap value.

Did you get it right without looking?

One question tells you little. A timed set on Depreciation (Straight Line and Diminishing Balance Methods) shows your real accuracy, how long you take and where you lose marks.

Practise Depreciation (Straight Line and Diminishing Balance Methods)Free diagnostic mock

More Depreciation (Straight Line and Diminishing Balance Methods) questions