Straight Line Method (SLM) MCQs Quiz | Class 10
This quiz is designed for **Class X** students studying **Elements of Book-Keeping & Accountancy (Code 254)**, focusing on **Unit 2: Depreciation**, specifically the **Straight Line Method (SLM)**. It covers key concepts such as calculating depreciation using the formula: Depreciation = (Cost – Scrap Value) / Useful Life, and understanding that a fixed amount of depreciation is charged each year. Test your understanding and remember to submit your answers to see your score and download a detailed answer PDF for review.
Deep Dive into Straight Line Method (SLM) of Depreciation
What is Depreciation?
Depreciation refers to the systematic reduction in the value of an asset over its useful life due to wear and tear, obsolescence, passage of time, or exhaustion. It’s an accounting method used to allocate the cost of a tangible asset over its useful life.
Why is Depreciation Charged?
- To ascertain the true profit or loss of the business.
- To present a true and fair view of the financial position.
- To replace the asset when its useful life expires.
- To comply with legal requirements.
- To reduce tax liability.
The Straight Line Method (SLM)
The Straight Line Method is one of the simplest and most widely used methods of calculating depreciation. Under this method, the amount of depreciation remains constant throughout the useful life of the asset. It assumes that the asset provides equal utility each year.
Formula for Straight Line Method:
Depreciation = (Cost of Asset – Estimated Scrap Value) / Estimated Useful Life of Asset
Alternatively, if the rate of depreciation is given:
Annual Depreciation = (Cost of Asset) x (Rate of Depreciation / 100)
Key Terms Explained:
- Cost of Asset: This includes the purchase price of the asset plus all directly attributable costs to bring the asset to its working condition for its intended use (e.g., freight, installation charges, erection costs).
- Estimated Scrap Value (or Residual Value): This is the estimated realizable value of the asset at the end of its useful life. It’s the amount the business expects to receive from selling the asset as scrap or second-hand.
- Estimated Useful Life: This is the period over which an asset is expected to be available for use by an enterprise, or the number of production units expected to be obtained from the asset.
Characteristics of SLM:
- Depreciation charge is constant every year.
- The book value of the asset reduces to its scrap value at the end of its useful life.
- It is suitable for assets where the utility is uniform throughout its life and the cost of maintenance is low in earlier years and high in later years.
Advantages of SLM:
- Simplicity: Easy to understand and apply.
- Equal Charge: Provides a constant depreciation charge each year, which simplifies financial planning.
- Full Write-off: Ensures that the full depreciable amount of the asset is written off over its useful life.
- Better Comparison: Allows for easier comparison of profits across different accounting periods, as the depreciation charge doesn’t fluctuate.
Disadvantages of SLM:
- Ignores Usage: Does not consider the actual usage or intensity of the asset’s use.
- Increasing Burden: In later years, the total cost of using the asset (depreciation + repairs) tends to increase, as depreciation remains constant while repair costs typically rise. This might overstate profits in later years if not accounted for properly.
- No Interest on Capital: Ignores the interest factor on the capital invested in the asset.
Example Calculation:
A machine was purchased for Rs. 1,00,000. Its estimated useful life is 10 years and its estimated scrap value is Rs. 10,000.
Annual Depreciation = (Rs. 1,00,000 – Rs. 10,000) / 10 years = Rs. 90,000 / 10 years = Rs. 9,000 per year
So, Rs. 9,000 will be charged as depreciation every year for 10 years.
Quick Revision Points:
- SLM charges a fixed amount of depreciation annually.
- Formula: (Cost – Scrap Value) / Useful Life.
- Suitable for assets with uniform utility.
- Simplest method, easy to calculate.
- Does not account for varying usage or increasing repair costs over time.
Practice Questions:
- Which method of depreciation ensures that the asset is completely written off to its scrap value?
- What does ‘Cost of Asset’ include in the depreciation calculation?
- If an asset’s useful life is 5 years, and its cost is 50,000 with no scrap value, what is the annual depreciation using SLM?
- State one advantage of the Straight Line Method.
- Why might the Straight Line Method not be ideal for assets that are heavily used in initial years and less in later years?
