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Question
A firm purchased a plant for ₹ 40,000. Erection charges amounted to ₹ 2,000. The effective life of the plant is 5 years. Calculate the amount of depreciation per year under the straight-line method.
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Solution
Calculation of the amount of depreciation
Amount of depreciation = `("Original cost" - "Scrap value")/"Estimated life"`
Original cost = Purchase of plant + Erection charges
= ₹ 40,000 + ₹ 2,000 = ₹ 42,000
Estimated life = 5 years = `(₹ 42,000 - 0)/(5 "years")` = ₹ 8,400
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