Straight-line depreciation calculation — quick check A machine costs ₹5,000, has a service life of 5 years, and a salvage value of ₹1,000. What is the annual depreciation by the straight-line method?
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A₹300 per year
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B₹600 per year
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C₹800 per year
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D₹1,000 per year
Answer
Correct Answer: ₹800 per year
Explanation
Introduction / Context:Straight-line (SL) depreciation allocates an equal share of the depreciable base to each year of service, making it the simplest accounting method for capital cost allocation.
Given Data / Assumptions:
- Purchase cost P = ₹5,000.
- Salvage value S = ₹1,000.
- Life n = 5 years.
Concept / Approach:The straight-line formula is Dep(year) = (P − S)/n. The depreciable base is the portion of cost that will be written off over the life, excluding salvage.
Step-by-Step Solution:Compute depreciable base: P − S = 5,000 − 1,000 = 4,000.Divide by life n: 4,000 / 5 = 800.Annual SL depreciation = ₹800 per year.
Verification / Alternative check:Summing ₹800 for 5 years gives ₹4,000, which equals the depreciable base, confirming the calculation.
Why Other Options Are Wrong:
- ₹300/₹600: understate the depreciable charge; total would not reach ₹4,000.
- ₹1,000: would overstate annual charge; total would exceed depreciable base.
Common Pitfalls:
- Forgetting to subtract salvage value from purchase cost.
- Confusing SL with accelerated methods like SYD or declining-balance.
Final Answer:₹800 per year