Question

a) A truck is bought for RO 30,000 and depreciation is charged at 10% p.a. by using written down value method, the amount of depreciation at the end of first year RO 3,000 and book value of the truck is RO 27,000. The amount of depreciation at the end of second year RO 2,700 and book value of the truck is RO 24.300 What does the amount book value of truck represent? Does this balance represent the original value of truck at the end of each year? Yes or no, comment on your answer. (Suggested: 80 – 100 words)
b) Truck is bought for RO 40,000 with an estimated useful life of 4 years. The expected scrap vahue at the end of its useful life is RO 2,000. Calculate the WDV Rate (Written Down Value method) and Prepare the Depreciation Schedule for 4 years.

Answer 1

a) The amount of book value represent the Written Down value of the truck at the year end. This is equal to original purchase value less the accumulated depreciation till the date.

If we see for Motor vehicles , the WDV method gives a better estimate of the asset value . It charges a

higher depreciation towards the initial years which covers the obsolescence risk of the truck. As the truck gets older , the depreciation gets lower but the repair cost goes higher so that the total service cost remain the same.

We can therefore say that the Book value replicated the written down value of the truck quite reasonably.

b)

We know , WDV depreciation rate =R= 1- (S/C)^1/n

Where n=life=4 yrs

S=scrap value=2000

C = cost of asset =40000

R=1-(2000/40000)^1/4

R =52.713%

Depreciation Schedule
Year	Opening Asset value	Depreciation rate	Depreciation for Year	Closing Book Value
1	40,000	52.713%	21,085.17	18,914.83
2	18,914.83	52.713%	9,970.56	8,944.27
3	8,944.27	52.713%	4,714.79	4,229.49
4	4,229.49	52.713%	2,229.49	2,000.00