How to calculate depreciation using straight line method?

Finance ManagementAccountingAcademic Content

Solution

The solution is given below −

Cost of machine = Rs. 200000
Salvage value = Rs. 25000
Total life = 8 years

Formula

Straight line depreciation = (ADE) / (CA –SV)

Here ADE = Annual depreciation expenses, CA = Cost of the asset, SV = Salvage value

First method (using salvage value)

Cost of the asset – salvage value = 200000 – 25000 => 175000

Annual depreciation = ((cost of the asset) – (salvage value))/life of machinery

            = 175000/8

            = 21875

So by above calculations Rs. 21,875 will be depreciated from 200000 annually for 8 years.

Second method (if depreciation amount is known)

Straight line depreciation = (annual depreciation amount)/total depreciable cost

            = 21875/175000

       = 12.5%

YearBook value (beginning of year)DepreciationBook value (End of year)
1Rs. 20000021875Rs. 178125
2Rs. 17812521875Rs. 156250
3Rs. 15625021875Rs. 134375
4Rs. 13437521875Rs. 112500
5Rs. 11250021875Rs. 90625
6Rs. 9062521875Rs. 68750
7Rs. 6875021875Rs.46875
8Rs. 4687521875Rs. 25000

From above table book value of the machinery at the end of 8 years is same as salvage value

Over the life of the asset it should be depreciate to its salvage value.

raja
Updated on 13-Aug-2020 11:02:53

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