An asset costing Rs. 1,50,000 is expected to have useful life of 5 years and scrap value of Rs. 30,000. Using linear depreciation method which of the following are TRUE?
A. Annual depreciation is Rs. 24,000
B. Depreciation rate is 20% per annum
C. Depreciation rate is 24% per annum
D. Annual depreciation is Rs. 22,000
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → A and B only
In the linear (straight-line) method the depreciable amount, cost − scrap value, is written off in equal parts over the useful life.
\( \displaystyle \text{Annual depreciation}=\frac{\text{Cost}-\text{Scrap value}}{\text{Useful life}} \)
\( \displaystyle =\frac{150000-30000}{5} \)
\( \displaystyle =\frac{120000}{5}=24000 \)
The rate of depreciation is the annual depreciation as a percentage of the depreciable amount, that is, one-fifth each year:
\( \displaystyle \text{Rate}=\frac{24000}{120000}\times 100=20\% \)
So the annual depreciation is Rs. 24,000 and the depreciation rate is 20% per annum.
Checking the statements
(A) Annual depreciation is Rs. 24,000 — Correct. (1,50,000 − 30,000) ÷ 5 = 24,000.
(B) Depreciation rate is 20% per annum — Correct. 24,000 is 20% of the depreciable amount 1,20,000.
(C) Depreciation rate is 24% per annum — Incorrect. The rate is 20%; 24 is the annual depreciation in thousands, not a percentage.
(D) Annual depreciation is Rs. 22,000 — Incorrect. The annual depreciation is Rs. 24,000.