A vehicle costing Rs. 9,00,000 has a scrap value of Rs. 3,60,000. If the annual depreciation charge is Rs. 60,000, then the useful life of the vehicle using linear depreciation method is:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 9 years
In the linear (straight line) method,
\( \displaystyle \text{Annual depreciation}=\frac{\text{Cost}-\text{Scrap value}}{\text{Useful life}} \)
So
\( \displaystyle \text{Useful life}=\frac{900000-360000}{60000} \)
\( \displaystyle =\frac{540000}{60000} \)
\( \displaystyle =9\text{ years} \)
Why the other options are incorrect
Option (1) 7 years — Incorrect. 7 years would give a yearly charge of \( \frac{540000}{7}\approx \) Rs. 77,143, not Rs. 60,000.
Option (3) 8 years — Incorrect. 8 years would give Rs. 67,500 a year, not Rs. 60,000.
Option (4) 6 years — Incorrect. 6 years is 360000 ÷ 60000, the scrap value divided by the charge; the charge applies to the total fall in value, cost − scrap value.