Question

Determine the present value of a building that was constructed 30 years ago at Rs. 50,000. The estimated life of the building is 50 years, at the end of which it will have 10% scrap value of its cost of construction. Depreciation is to be calculated by straight line method.
1. Rs. 24,000
2. Rs. 25,000
3. Rs. 23,000
4. Rs. 15,000

Answer 1

Correct Answer - Option 3 : Rs. 23,000

Concepts:

The straight-line method of depreciation assumes a constant rate of depreciation. It calculates how much a specific asset depreciates in one year, and then depreciates the asset by that amount every year after that.

To calculate the straight-line depreciation rate for your asset, simply subtract the salvage value from the asset cost to get total depreciation, and then divide that by useful life to get annual depreciation:

Annual depreciation = (purchase price - salvage value) / useful life

Calculation:

Cost of Construction of building i.e. Purchase Value = Rs. 50, 000/-

Salvage Value = 10 % of Purchase Value = Rs. 5,000/-

Design life of building = 50 Years

Annual Depreciation = (50,000-5,000)/50

⇒ Annual Depreciation = Rs. 900 /year

According to straight-line depreciation method, the building will depreciate Rs. 900  every year.

Total Depreciation at the end of 30 years = Rs. 900 × 30 = Rs. 27,000/-

Present Value at the end of 30 years = {Purchase Value} – {Total Depreciation at the end of 30 years}

= Rs. 50,000 – Rs. 27000

= Rs. 23,000/- Ans.