Question

The cost of construction of a structure is Rs. 4,00,000/-. The estimated life of the structure is 50 years. At the end of its life period the scrap value is 10% of cost of construction. Considering depreciation at constant rate, what will be the value of the structure after 25 years (excluding scrap value)?
1. Rs. 2,20,000
2. Rs. 3,60,000
3. Rs. 3,00,000
4. Rs. 1,80,000

Answer 1

Correct Answer - Option 4 : Rs. 1,80,000

Concept:

 

1. Straight line method/Constant rate method: This assumes that the loss in the value of the property is same every year and at the end of its useful life it is equal to its scrap value.

\({\rm{Annual\;Depreciation}} = \frac{{{\rm{Purchasing\;cost}} - {\rm{salvage\;value}}}}{{{\rm{life\;of\;machine}}}}\)

2. Constant percentage method/Declining balance method: This assumes that thew property loses it value by a constant percentage of its value at the begining of each year. (n = life of machine)

\(Annual{\rm{ }}\;Depreciation = 1 - {\left( {\frac{{Scrap{\rm{ }}value}}{{original{\rm{ }}cost}}} \right)^{\frac{1}{n}}}\)

Calculation

Given:

FC = Rs. 4,00,000 /-

SV = 10% of FC = Rs. 40,000 /-

Resign life, N = 50 years

Total depreciation = FC - SV

Total depreciation = 4,00,000 - 40,000 = Rs. 360,000

Depreciation per year = \(\frac{{{\rm{Total\;Depreciation}}}}{{{\rm{Deign\;life}}}}\)

Depreciation per year = 360000/50 = Rs. 7200

Total depreciation after 25 years = 7200 × 25 = Rs. 180,000

∴ Value of the structure after 25 years (excluding scrap value) = 4,00,000 - 180,000 - 40,000 = Rs. 180,000