Question

Depreciation is charged on the book value according to --- Method.

• A. Straight Line Method
• B. Units of Production Method
• C. Diminishing Balance method
• D. Sum of the Years Digits Method

Answer 1

Answer:

C. Diminishing Balance method

Diminishing or Written down value method

• Diminishing or written down value method Under this method, a fixed percentage is written off every year on the book value of asset at the beginning of the year, i.e., original cost less depreciation provided till date. As the book value or written down value is diminishing each year, the amount of depreciation in each installment will also be diminishing. In other words, rate of depreciation remains fixed, while the amount of depreciation charged goes on diminishing with the passage of time.

Advantages of Written Down Value Method

1. Realistic Higher depreciation is charged in earlier years when asset's utility is higher as compared to last years.

2. Equal burden - It results into almost equal burden of depreciation and repair expenses taken together every year.

3. Tax purpose - Income Tax Act accept this method.

4. Loss due to obsolescence gets reduced because a large portion of cost is written off in earlier years.

5. Suitable for long lasting assets which require increased repair expenses in later years.

Limitations of Written Down Value Method

1. Depreciable cost cannot be fully written off So that the value of asset never be zero.

2. Difficult to find a suitable rate of depreciation