A machine is depreciated @20% on reducing balance. The original cost o...
Calculation of Effective Life of the Machine
Given Data:
- Original cost of the machine: ₹1,00,000
- Ultimate scrap value: ₹30,000
- Depreciation rate: 20%
Formula for Depreciation on Reducing Balance Method:
Depreciation for the year = (Opening Book Value - Scrap Value) * Depreciation Rate
Calculation:
- Depreciation for the first year = (1,00,000 - 30,000) * 20% = ₹14,000
- Book value at the end of the first year = 1,00,000 - 14,000 = ₹86,000
Iterating the above steps for subsequent years:
- Depreciation for the second year = (86,000 - 30,000) * 20% = ₹11,200
- Book value at the end of the second year = 86,000 - 11,200 = ₹74,800
Continue the calculation until the book value reaches the scrap value.
Effective Life:
- By iterating the above steps, we find that the book value reaches the scrap value after 5 years.
- Therefore, the effective life of the machine is approximately 5 years.
Therefore, the correct answer is:
c) 5 years (approx)
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