Advertisements
Advertisements
Question
State the limitations of straight-line method of depreciation.
Advertisements
Solution
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.
APPEARS IN
RELATED QUESTIONS
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 method of depreciation in which the rate of depreciation is fixed but the amount of depreciation reduces every year.
State whether the following statement is True or False with reasons:
Depreciation is charged on Current Assets only.
Complete the following sentence:
Depreciation is charged on ______ asset.
Furniture costing ₹ 5,000 was purchased on 1.1.2016, the installation charges being ₹ 1,000. The furniture is to be depreciated @ 10% p.a. on the diminishing balance method. Pass journal entries for the first two years.
M/s Omkar Enterprise Jalgaon acquired a Printing Machine for ₹ 75,000 on 1st 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.
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 the Written Down Value Method, on 31st March every year.
Prepare Printing Machine Account for the first four years.
A firm buys a machine that wears out faster in early years but provides greater efficiency initially. Which depreciation method would most accurately reflect this pattern?
Under which method might two identical machines purchased at the same cost show different depreciation expenses in two companies?
A company uses a method that results in high depreciation expense initially and lower in later years. This pattern benefits them because:
