Diminishing Balance Method (WDV) MCQs Quiz | Class 10
This quiz for Class X, Subject Elements of Book-Keeping & Accountancy (Code 254), covers Unit 2: Depreciation, specifically focusing on the Diminishing Balance Method (WDV). Test your understanding of depreciation on written down value and the concept of decreasing yearly amounts. Complete the quiz and download your answer sheet as a PDF.
Understanding the Diminishing Balance Method (WDV)
The Diminishing Balance Method, also known as the Written Down Value (WDV) Method or Reducing Balance Method, is a technique used to calculate depreciation on fixed assets. Unlike the Straight Line Method, this approach charges a fixed percentage of the asset’s book value each year, leading to a decreasing amount of depreciation over the asset’s life.
Key Concepts of WDV Method
- Depreciation on Written Down Value: Depreciation is calculated on the asset’s book value (cost minus accumulated depreciation) at the beginning of each accounting period, rather than on its original cost.
- Decreasing Yearly Amount: Since the base for calculation (WDV) reduces each year, the amount of depreciation charged also decreases annually. This means higher depreciation is charged in the initial years and lower depreciation in later years.
- Never Reduces to Zero: A key characteristic of this method is that the asset’s value in the books will never be fully reduced to zero, even after its useful life, because a percentage of a diminishing balance will always leave a residual value.
- Fixed Rate: A constant percentage rate is applied to the WDV each year.
Advantages of Diminishing Balance Method
- Matching Principle: It helps to equalize the total charge against profit and loss account (depreciation plus repairs) over the useful life of the asset. In earlier years, depreciation is high and repair costs are low; in later years, depreciation is low and repair costs are generally higher.
- Realistic Approach: Many assets lose more value and are more productive in their early years, justifying higher depreciation in those periods.
- Tax Benefits: In many jurisdictions, accelerated depreciation (like WDV) in early years can result in tax benefits.
Disadvantages of Diminishing Balance Method
- Never Zero Value: The asset’s book value never becomes zero, which can be an accounting inconvenience if the asset is fully used up and discarded.
- Complexity: While not overly complex, it requires recalculating the WDV each year, which can be slightly more involved than the Straight Line Method.
Comparison: Straight Line Method vs. Diminishing Balance Method
| Feature | Straight Line Method | Diminishing Balance Method |
|---|---|---|
| Base for Depreciation | Original Cost (Cost – Scrap Value) | Written Down Value (Book Value) |
| Annual Depreciation Amount | Constant / Fixed | Decreasing / Reduces each year |
| Asset Value to Zero? | Can reduce to zero (if scrap value is zero) | Never reduces to zero |
| Impact on Profits (initial years) | Lower charge, higher profit | Higher charge, lower profit |
| Matching Principle | Less effective (depreciation constant, repairs increase) | More effective (depreciation decreases, repairs increase) |
Quick Revision Points
- WDV calculates depreciation on the asset’s current book value.
- Depreciation amount decreases annually.
- Asset value never becomes zero.
- Balances the combined cost of depreciation and repairs over time.
- Suitable for assets that are more productive in their early years.
Practice Questions
Test your understanding further with these questions (answers not provided):
- A machine was purchased for Rs. 5,00,000. It is depreciated at 15% per annum using the Diminishing Balance Method. Calculate the WDV at the end of the third year.
- Explain why the Diminishing Balance Method aligns better with the matching principle for assets like machinery compared to the Straight Line Method.
- If an asset has a significant residual value, why might the WDV method be preferred by an accountant?
- What would happen if the depreciation rate under the WDV method was 100%? Is this practical?
- Discuss the implications of the WDV method never reducing an asset’s book value to zero, especially when the asset is completely worn out.
