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Question

Which one of the following depreciation methods is most suitable for a coal mine?


A
Diminishing balance method
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B
Depletion method
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C
Fixed instalment method
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D
Sum of year's digits method
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Solution

The correct option is D Depletion method
The depletion method of depreciation is most suitable for coal mine. This method is specially used for those assets which deplete with use. The cost of the asset is divided by total workable deposits. For example :

If a mine has 2 lakh tons of coal and the value of mine is Rs. 5 lakhs, each ton of coal will cost Rs. 2½. The quantity of coal taken out of the mine in a period will be multiplied by the rate per ton, i.e., Rs. 2½ and the resultant figure will be the amount of depreciation.


Accountancy

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