Question

The initial cost of an equipment is Rs. 1,00,000. Its salvage value at the end of accounting life of 5 years is Rs. 10,000. The difference in depreciation (in Rs.) computed using 'double-declining balance method' and 'straight line method' of depreciation in Year-2 is ______ (in positive integer).

Hint:

Understanding different depreciation methods is essential for accurate financial reporting and tax calculation. Each method can significantly impact the reported earnings and tax liabilities.

Answer 1

Step 1: Calculate the straight line depreciation. For the straight line method, the annual depreciation is calculated as: \[ \text{Annual Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Life}} \] \[ \text{Annual Depreciation} = \frac{1,00,000 - 10,000}{5} = 18,000 \text{ Rs per year} \] Step 2: Calculate the double-declining balance depreciation for the first two years. The double-declining balance rate is: \[ \text{Rate} = \frac{2}{\text{Life}} = \frac{2}{5} = 40\% \] First year depreciation: \[ \text{Year-1 Depreciation} = 1,00,000 \times 40\% = 40,000 \text{ Rs} \] Value at end of Year-1: \[ \text{End of Year-1 Value} = 1,00,000 - 40,000 = 60,000 \text{ Rs} \] Second year depreciation: \[ \text{Year-2 Depreciation} = 60,000 \times 40\% = 24,000 \text{ Rs} \] Step 3: Calculate the difference in depreciation for Year-2. \[ \text{Difference} = \text{Year-2 Double-Declining} - \text{Year-2 Straight Line} \] \[ \text{Difference} = 24,000 - 18,000 = 6,000 \text{ Rs} \]