Question

Assume an asset Rs 400000 worth of a tractor with an expected life of 10 years and salvage value of Rs 50000. The rate of annual depreciation with straight line method would be:

• A. Rs 50000
• B. Rs 35000
• C. Rs 350000
• D. Rs 3500

Hint:

Always subtract the salvage value from the asset's initial cost before dividing by the useful life. The salvage value represents the remaining value that does not depreciate.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
Depreciation represents the gradual loss of value of an asset over its useful lifespan due to wear and tear, age, or obsolescence.
The Straight-Line Method assumes that the asset loses value at a constant annual rate.

Step 2: Key Formula or Approach:
The formula for Straight-Line Depreciation is:
\[ \text{Annual Depreciation} = \frac{\text{Purchase Value} - \text{Salvage Value}}{\text{Useful Life (Years)}} \]

Step 3: Detailed Explanation:
We are given:
- Purchase Value of the tractor $= \text{Rs } 4,00,000$
- Salvage Value (value at the end of its useful life) $= \text{Rs } 50,000$
- Expected Useful Life $= 10$ years
Substituting these values into the formula:
\[ \text{Annual Depreciation} = \frac{4,00,000 - 50,000}{10} \]
\[ \text{Annual Depreciation} = \frac{3,50,000}{10} \]
\[ \text{Annual Depreciation} = \text{Rs } 35,000 \]
This means the tractor depreciates by Rs 35,000 each year.
Final Answer:
The rate of annual depreciation is Rs 35,000, matching Option (B).