Question

On using reducing balance method on an asset of Rs 40,000 at the rate of 10% p.a., depreciation for third year will be __________ .

• A. Rs 12,000
• B. Rs 3,600
• C. Rs 3,240
• D. Rs 4,000

Answer 1

The correct option is C Rs 3,240

Depreciation is charged on the book value of the asset. Since book value keeps on reducing by the annual charge of depreciation, it is known as ‘reducing balance method’

As per this method

Depreciation on 1st year on Rs 40,000@10% = Rs 4,000

Depreciation on 2nd year on Rs 36000 (40,000-4000)@10% = Rs 3,600

Depreciation on 3rd year on Rs 32,400 (36,000-3600)@10% = Rs 3,240