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प्रश्न
State the limitations of straight-line method of depreciation.
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उत्तर
Following are the limitations of straight-line method of depreciation:
- Ignores the actual use of the asset:
Under this method, a fixed amount of depreciation is provided on each asset by applying the predetermined rate of depreciation on its original cost. But, the actual use of the asset is not considered in the computation of depreciation. - Ignores the interest factor:
This method does not take into account the loss of interest on the amount invested in the asset. That is, the amount would have earned interest, had it been invested outside the business is not considered. - Total charge on the assets will be more when the asset becomes older:
With the passage of time, the cost of maintenance of an asset goes up. Hence, the amount of depreciation and cost of maintenance put together is less in the initial period and goes up year after year. But, this method does not consider this. - Difficulty in the determination of scrap value:
It may be quite difficult to assess the true scrap value of the asset after a long period say 10 or 15 years after the date of its installation.
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संबंधित प्रश्न
Answer in One Sentence only:
Why depreciation is charged even in the year of loss?
Write the word/term/phrase which can substitute the following statement:
The period for which the asset remains in working condition.
State whether the following statement is True or False with reasons:
Depreciation increases the value of the asset.
State the advantages of straight-line method of depreciation.
State the advantages of written down value method of depreciation.
Machinery was purchased on 1st January 2015 for ₹ 4,00,000. ₹ 15,000 was spent on its erection and ₹ 10,000 on its freight charges. Depreciation is charged at 10% per annum on the straight-line method. The books are closed on 31st March each year. Calculate the amount of depreciation on machinery for the first two years.
On 1st July 2016 M/s. Ramai & Co. .sold Machinery for ₹ 7,000 the original cost of ₹ 10,000 which was purchased on 18th April 2015. Find out the profit or loss on sale of Machinery by charging depreciation at 10% p.a. on original cost on 31st March every year.
M/s Omkar Enterprise Jalgaon acquired a Printing Machine for ₹ 75,000 on 1 Oct 2015 and spent ₹ 5,000 on its transport and installation. Another Machine for ₹ 45,000 was purchased on 1st Jan 2017. Depreciation is charged at the rate of 20% on Written Down Value Method, on 31st march every year.
Prepare Printing Machine Account for the first four years.
On 1st April 2015, Farid of Nasik purchased a Motor Car for ₹ 55,000. The scrap value of the Motor Car was estimated at ₹ 10,000 and its estimated life is 10 years. The Registration charge for the Motor Car was ₹ 5,000.
Show Motor Car Account for first four years, assuming that the books of accounts are closed on 31st March every year.
A company uses a method that results in high depreciation expense initially and lower in later years. This pattern benefits them because:
