A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 35 - 35 of 93

Doorsteptutor material for Bank-PO is prepared by world's top subject experts: get questions, notes, tests, video lectures and more- for all subjects of Bank-PO.

Question 35

Question

MCQ▾

Under the diminishing balance method, depreciation is calculated on:

Choices

Choice (4)

a.

Market value

b.

Original Cost

c.

Scrap value

d.

Written down value

Answer

d.

Explanation

Under this method, as the value of asset goes on diminishing year after year, the amount of depreciation charged every year also goes on declining. depreciation is calculated on the book value of the asset at the beginning of that year, rather than on the Original cost. As the value of the asset and the depreciation charged on it goes on reducing year after year, the method is also known as Reducing Instalment Method or Written Down Value Method.

Merits:

  • Easy Calculation: It is easy to calculate the depreciation under this method event some new assets are purchased year after year. Different assets are grouped for the purpose of providing depreciation.
  • Equal charge against income: In this method, the total burden on Profit & Loss Account in respect of depreciation and repairs put together remains almost equal year after year. This is so because in the initial year՚s depreciation is more in comparison to repair charges whereas, in the later years, as the asset gets older, the amount of depreciation goes on decreasing while the expenses on repairs go on increasing, thus keeping the combined charge of depreciation and repairs almost uniform.
  • No undue pressure in later years: The efficiency and usefulness of a machine is more in the earlier years than in later years. Hence, the depreciation in first few years should be more in comparison to the later years. This is ensured by adopting the diminishing balance method.

Developed by: