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?
The diminishing balance method of depreciation, also known as the reducing balance method, calculates depreciation based on the book value (cost minus accumulated depreciation) at the beginning of each year. In this method, both the asset's residual value and the annual depreciation rate are used to determine the depreciation charge.
Let's break down the solution for the first three years to figure out the depreciation charge:
Year 1:
The initial cost is #9,000.
Depreciation for Year 1 = Cost × Depreciation Rate = 9,000 × 10% = #900
Book Value at the end of Year 1 = Initial Cost - Depreciation = 9,000 - 900 = #8,100
Year 2:
Book value at the beginning of Year 2 is #8,100.
Depreciation for Year 2 = Book Value × Depreciation Rate = 8,100 × 10% = #810
Book Value at the end of Year 2 = Book Value - Depreciation = 8,100 - 810 = #7,290
Year 3:
Book value at the beginning of Year 3 is #7,290.
Depreciation for Year 3 = Book Value × Depreciation Rate = 7,290 × 10% = #729
The depreciation charge for the third year using the diminishing balance method is #729.