The correct answer is: D. Rs. 7,290
Explanation:
The diminishing balance method of depreciation is a method of calculating depreciation where the depreciation charge is calculated on the reducing balance of the asset. This means that the depreciation charge is higher in the early years of the asset’s life and lower in the later years.
To calculate depreciation using the diminishing balance method, you need to know the following:
- The original cost of the asset
- The rate of depreciation
The rate of depreciation is usually expressed as a percentage. In this case, the rate of depreciation is 10%.
To calculate the depreciation charge for the first year, you multiply the original cost of the asset by the rate of depreciation. In this case, the depreciation charge for the first year is 100,000 x 10% = 10,000.
The depreciation charge for the second year is calculated on the reducing balance of the asset. In this case, the reducing balance of the asset at the beginning of the second year is 100,000 – 10,000 = 90,000. The depreciation charge for the second year is 90,000 x 10% = 9,000.
The depreciation charge for the third year is calculated on the reducing balance of the asset at the beginning of the third year. In this case, the reducing balance of the asset at the beginning of the third year is 90,000 – 9,000 = 81,000. The depreciation charge for the third year is 81,000 x 10% = 8,100.
The depreciation charge for the fourth year is calculated on the reducing balance of the asset at the beginning of the fourth year. In this case, the reducing balance of the asset at the beginning of the fourth year is 81,000 – 8,100 = 72,900. The depreciation charge for the fourth year is 72,900 x 10% = 7,290.
Therefore, the amount of depreciation shown in the profit and loss account for the year ending 31st December, 2004 is Rs. 7,290.