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

Under the diminishing balance method of depreciation, the annual depreciation charge is calculated on which of the following?

Depreciation under the diminishing balance method is charged on the book value (written down value) at the start of each year. Because this value reduces every year after depreciation, the annual charge keeps declining, unlike the straight line method, which uses original cost.

  1. AOriginal cost of the asset every year
  2. BBook value of the asset at the beginning of each yearCorrect
  3. CScrap value of the asset
  4. DAverage of cost and scrap value

Explanation

In the diminishing balance method a fixed percentage is applied to the opening written down value each year. Since the book value falls, the charge falls every year. Applying the rate to original cost describes the straight line method.

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