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An asset has a useful life of 4 years. If it is depreciated by diminishing balance method its book value at the end of 4th year is 24% of its original cost. Hence the rate of depreciation applied is?
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An asset has a useful life of 4 years. If it is depreciated by diminis...
Calculation of Rate of Depreciation Applied by Diminishing Balance Method
We have to calculate the rate of depreciation applied by diminishing balance method to the asset.
Let the original cost of the asset be Rs. 100.
Book value of asset at the end of 4th year = 24% of its original cost
Therefore, book value of asset at the end of 4th year = Rs. 24
Applying the formula of diminishing balance method, we have:
Depreciation rate = 1 - (book value at the end of useful life/original cost)1/useful life
Substituting the given values, we get:
Depreciation rate = 1 - (24/100)1/4 = 0.3125 or 31.25%
Therefore, the rate of depreciation applied by diminishing balance method to the asset is 31.25%.
Diminishing balance method is a method of depreciation where the depreciation expense is charged at a fixed percentage of the diminishing book value of the asset. In this method, the depreciation expense is higher in the initial years and decreases with the passage of time.
The formula for calculating depreciation under diminishing balance method is:
Depreciation expense = Book value of asset at the beginning of the year x Depreciation rate
Where, Depreciation rate = (100/useful life) x (2/100)
This method is suitable for assets that have a higher rate of wear and tear in the initial years of their useful life.
Given Data:
- Useful life of asset = 4 years
- Book value of asset at the end of 4th year = 24% of its original cost
Solution:
We have to calculate the rate of depreciation applied by diminishing balance method to the asset.
Step 1: Calculation of Depreciation Rate
Let the original cost of the asset be Rs. 100.
Book value of asset at the end of 4th year = 24% of its original cost
Therefore, book value of asset at the end of 4th year = Rs. 24
Applying the formula of diminishing balance method, we have:
Depreciation rate = 1 - (book value at the end of useful life/original cost)1/useful life
Substituting the given values, we get:
Depreciation rate = 1 - (24/100)1/4 = 0.3125 or 31.25%
Therefore, the rate of depreciation applied by diminishing balance method to the asset is 31.25%.
Step 2: Explanation of Diminishing Balance Method
Diminishing balance method is a method of depreciation where the depreciation expense is charged at a fixed percentage of the diminishing book value of the asset. In this method, the depreciation expense is higher in the initial years and decreases with the passage of time.
The formula for calculating depreciation under diminishing balance method is:
Depreciation expense = Book value of asset at the beginning of the year x Depreciation rate
Where, Depreciation rate = (100/useful life) x (2/100)
This method is suitable for assets that have a higher rate of wear and tear in the initial years of their useful life.
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An asset has a useful life of 4 years. If it is depreciated by diminishing balance method its book value at the end of 4th year is 24% of its original cost. Hence the rate of depreciation applied is?
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An asset has a useful life of 4 years. If it is depreciated by diminishing balance method its book value at the end of 4th year is 24% of its original cost. Hence the rate of depreciation applied is? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about An asset has a useful life of 4 years. If it is depreciated by diminishing balance method its book value at the end of 4th year is 24% of its original cost. Hence the rate of depreciation applied is? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for An asset has a useful life of 4 years. If it is depreciated by diminishing balance method its book value at the end of 4th year is 24% of its original cost. Hence the rate of depreciation applied is?.
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