Valuation MCQ with answer and solution

Concept

Straight line method of depreciation

Formula

Depreciation = (C - S) / n

Step-by-step solution

1. Analyze the assumption: loss of machine value is directly proportional to its age. 2. In the Straight Line Method, a constant uniform depreciation charge is deducted every year: D = (C - S)/n. 3. Thus, accumulated depreciation increases linearly with age: D_total = t × D. 4. Therefore, option A (Straight line method) is the correct method. Answer: A

Explanation

The Straight Line Method of depreciation assumes that the asset loses an equal amount of value every year throughout its useful working life. Consequently, the cumulative depreciation is directly proportional to the age of the machine: Annual Depreciation = (Original Cost - Salvage Value) / Useful Life.

Why the other options are wrong

B) Diminishing balance method assumes depreciation is highest in initial years and decreases exponentially. C) Sinking fund method accounts for compound interest accumulation on annual sinking fund deposits. D) Annuity charging method considers interest on the unrecovered capital investment.

Shortcut

Linear loss with age (constant annual amount) = Straight Line Method.

Common mistake

Selecting Diminishing Balance Method, where depreciation is a fixed percentage of reducing book value, decreasing over time.