The original cost of equipment is rupees 1,00,000. Its salvage value at the end of its useful life of five years is 40,000. Its book value at the end of two years of its useful life as per straight line method of evaluation of depreciation will be
76000
Let's break down how to calculate the book value of the equipment using the straight line depreciation method.
Calculating Book Value with Straight Line Depreciation
The straight line method is a simple way to calculate depreciation. It assumes that an asset loses value evenly over its useful life. The formula involves the original cost, salvage value, and the useful life of the asset.
Understanding Key Terms
- Original Cost: The initial cost of purchasing the asset. Here, it is $\text{₹}1,00,000$.
- Salvage Value: The estimated value of the asset at the end of its useful life. Here, it is $\text{₹}40,000$.
- Useful Life: The estimated number of years the asset will be used. Here, it is 5 years.
- Depreciable Amount: The total amount of the asset's cost that will be depreciated over its useful life. This is the Original Cost minus the Salvage Value.
- Annual Depreciation: The amount of depreciation expense recorded each year. This is the Depreciable Amount divided by the Useful Life.
- Book Value: The value of the asset shown on the balance sheet at a specific point in time. It is the Original Cost minus the accumulated depreciation up to that point.
Step-by-Step Calculation of Depreciation and Book Value
Step 1: Calculate the Depreciable Amount
The depreciable amount is the cost that will be spread over the asset's life.
Depreciable Amount $=$ Original Cost $-$ Salvage Value
Depreciable Amount $=$ $\text{₹}1,00,000 - \text{₹}40,000 = \text{₹}60,000$
Step 2: Calculate the Annual Depreciation Expense (Straight Line Method)
The annual depreciation is the constant amount charged each year.
Annual Depreciation $=$ $\frac{\text{Depreciable Amount}}{\text{Useful Life}}$
Annual Depreciation $=$ $\frac{\text{₹}60,000}{5 \text{ years}} = \text{₹}12,000 \text{ per year}$
Step 3: Calculate Total Depreciation after 2 Years
Since it's the straight line method, the depreciation is the same each year.
Total Depreciation after 2 Years $=$ Annual Depreciation $\times$ Number of Years
Total Depreciation after 2 Years $=$ $\text{₹}12,000/\text{year} \times 2 \text{ years} = \text{₹}24,000$
Step 4: Calculate the Book Value at the end of 2 Years
The book value is the remaining value of the asset after accounting for depreciation.
Book Value $=$ Original Cost $-$ Total Depreciation after 2 Years
Book Value $=$ $\text{₹}1,00,000 - \text{₹}24,000 = \text{₹}76,000$
The book value of the equipment at the end of two years is $\text{₹}76,000$.
| Item | Value |
|---|---|
| Original Cost | $\text{₹}1,00,000$ |
| Salvage Value | $\text{₹}40,000$ |
| Useful Life | 5 years |
| Depreciable Amount | $\text{₹}60,000$ |
| Annual Depreciation | $\text{₹}12,000$ |
| Total Depreciation (2 years) | $\text{₹}24,000$ |
| Book Value (end of 2 years) | $\text{₹}76,000$ |
Comparing with Given Options
- Option 1: 68000
- Option 2: 76000
- Option 3: 58000
- Option 4: 940000
Our calculated book value of $\text{₹}76,000$ matches Option 2.
Revision Table: Depreciation Concepts
| Concept | Description | Calculation (Straight Line) |
|---|---|---|
| Depreciation | The process of allocating the cost of an asset over its useful life. | N/A |
| Depreciable Amount | The portion of asset cost that is depreciated. | Original Cost - Salvage Value |
| Annual Depreciation | The depreciation expense recognized each year. | Depreciable Amount / Useful Life |
| Accumulated Depreciation | The total depreciation recorded for an asset up to a specific date. | Annual Depreciation × Number of Years Used |
| Book Value | The asset's value after deducting accumulated depreciation. | Original Cost - Accumulated Depreciation |
| Salvage Value | Estimated residual value at the end of useful life. | Given or estimated |
Additional Information: Methods of Depreciation
Besides the straight line method, other common methods for calculating depreciation include:
- Declining Balance Method (e.g., Double Declining Balance): An accelerated method where a higher depreciation expense is recorded in the earlier years of an asset's life.
- Sum-of-the-Years'-Digits Method: Another accelerated method, using a decreasing fraction of the depreciable amount each year.
- Units-of-Production Method: Depreciation is based on the asset's usage rather than time, often measured in machine hours or units produced.
Each method impacts the amount of depreciation expense recorded annually and thus affects the reported book value and net income over the asset's life.
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