Amount of depreciation = ( Total cost – Scrap value ) / Estimated Life
Rate of depreciation = ( Amount of Depreciation / Original Cost ) * 100
Let us now look at a simple example to calculate amount of depreciation and Rate of depreciation, given a company purchased Machinery for Rs.2, 00,000. Its installation costs amounted to Rs.10, 000. Its estimated life is 5 years and the scrap value is Rs.10, 000. Calculate the amount and rate of depreciationTotal cost = Purchase Price + Installation Charges
= Rs.2, 00,000 + Rs.10, 000
= Rs. 2, 10,000
Amount of depreciation = ( Total cost – Scrap value ) / Estimated Life
= ( Rs.2, 10,000 – Rs.10, 000 ) / 5= Rs. 40,000
Rate of depreciation = ( Amount of depreciation/Original cost ) * 100
= ( Rs 40,000/Rs. 210,000 ) * 100= 19.04%
Under straight line method, for each of the five years, the amount of depreciation to be charged will be Rs.40, 000
Merits:
- It is very simple and easy to understand.
- The amount and rate of depreciation is easy to calculate
- Under this method, the book value of the asset becomes zero or equal to its scrap value at the expiry of its useful life.
Demerits
The amount of depreciation is same in all the years, although the usefulness of the machine to the business is more in the initial years than in the later yearsClick here to go back to Depreciation: Day 6
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