CA Inter P5 · Chapter 5 · Question 4 of 12
Ekam Packaging Ltd. bought a machine on 1 October for Rs. 48 lakh. Its estimated residual value is Rs. 3 lakh and useful life 9 years. The company uses the straight-line method and charged Rs. 5 lakh as depreciation for the year ending 31 March. What should the depreciation for the year be?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Rs. 2.5 lakh
Explanation
Annual depreciation = (Rs. 48 lakh - Rs. 3 lakh) / 9 = Rs. 5 lakh. The machine was used for 6 months (October to March), so depreciation = Rs. 5 lakh x 6/12 = Rs. 2.5 lakh. The company has overstated depreciation by Rs. 2.5 lakh. Rs. 2.67 lakh ignores residual value (48/9 x 6/12), and Rs. 5.33 lakh ignores both residual value and the time factor.
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