Question

Under Fixed installment method, Depreciation is calculated using

• A. Depreciation = Written down value * Rate of depreciation
• B. Depreciation = Total cost - Scrap value Estimated life
• C. Depreciation = (Cost of Asset - Residual Value) / Useful Life
• D. Depreciation = Cost of Asset / Useful Life

Answer 1

Answer:

B. Depreciation = Total cost - Scrap value Estimated life

Straight line method / Fixed installment method

• It is a methods of calculating depreciation.

• Under this method, a fixed percentage on the original cost of the asset is written off every year so that the value of the asset becomes zero at the end of its life period.

• The amount of depreciation charged annually will be constant.

• This method is useful when the service rendered by the asset is uniform from year to year.

• Depreciation = Total cost - Scrap value Estimated life

Advantages of Straight-line method

1. Simplicity

2. Equal distribution of depreciation to P/L Account throughout the life of asset.

3. Asset is completely written off.

Disadvantages of Straight line method

1. Difficulty in calculation when additional assets are purchased.

2. Uneven charge to P/L Account Total charge of depreciation and repairs on assets will be lighter in the earlier years and heavier in the later year years.

3. Unrealistic assumption that the asset gives equal result over different years