An equipment costing # 9,000 has an estimated residual value of #900, and is depreciated at 10% per annum. What is the depreciation charge for the three using diminishing balance method?
- #990
- #900
-
#729
- #810
The correct answer is: C
Explanation
Net Book Value at the beginning of Year 2 = Original cost - Depreciation charge for Year 1
Year 1 depreciation charge = Original cost x Depreciation rate
= #9,000 x 10%
= #900
Net Book Value at the beginning of Year 2 = #9,000 - #900
= #8,100
Now, we can calculate the depreciation charge for Year 2 using the diminishing balance method:
Depreciation charge for Year 2 = Net Book Value at the beginning of Year 2 x Depreciation rate = # 8,100 x 10%
= #810
Finally, we can calculate the depreciation charge for Year 3 using the same method:
Net Book Value at the beginning of Year 3 = Net Book Value at the beginning of Year 2 - Depreciation charge for Year 2
= #8,100 - #810
= #7,290
Depreciation charge for Year 3 = Net Book Value at the beginning of Year 3 x Depreciation rate
= #7,290 x 10%
= #729