asset goes up. Hence, the amount of depreciation and cost of maintenance put together is less in the initial period and goes up year after year. But, this method does not consider this. (d) Difficulty in the determination of scrap value It may be quite difficult to assess the true scrap value of the asset after a long period say or years after the date of its installation.
Suitability Straight line method of depreciation is suitable in case of fixed assets in respect of which useful life can be determined and maintenance and repair cost is the same throughout the life of the asset. Illustration On . . a firm purchased a machine at a cost of ` , , .
Its life was estimated to be years with a scrap value of ` , . Compute the amount of depreciation to be charged at the end of each year. Solution Original cost of the asset − Estimated scrap value Amount of depreciation per year = Estimated useful life of the asset in years , , – , , = = ` , per year = Illustration From the following information, calculate the amount of depreciation and rate of depreciation under straight line method. Purchase price of machine ` , Expenses to be capitalised ` , Estimated residual value ` , Expected useful life years Solution Original cost of the asset − Estimated scrap value Amount of depreciation per year = Estimated useful life of the asset in years , , – , , = = ` , per year = Amount of depreciation per year Rate of depreciation = x Original cost , = x = % , , Accountancy Note: Original cost = Purchase price + Expenses to be capitalised = , + , = ` , , Illustration Find out the rate of depreciation under straight line method from the following details: Original cost of the asset = ` , Estimated life of the asset = years Estimated scrap value at the end = `