A company bought an equipment worth Ghc 200,000 and the equipment is to be depreciated at 5%, using the reducing balance method. What would be the value of the asset after 3 years? A. Ghc 200,000 B. Ghc 171,475 C. Ghc 180,505 D. Ghc 190,000 E. Ghc 170,000
Question
A company bought an equipment worth Ghc 200,000 and the equipment is to be depreciated at 5%, using the reducing balance method. What would be the value of the asset after 3 years? A. Ghc 200,000 B. Ghc 171,475 C. Ghc 180,505 D. Ghc 190,000 E. Ghc 170,000
Solution
The reducing balance method, also known as the declining balance method, calculates depreciation by applying the depreciation rate to the non-depreciated balance. Here's how you can calculate the value of the asset after 3 years:
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In the first year, the depreciation is 5% of Ghc 200,000, which is Ghc 10,000. So, the value of the equipment after the first year is Ghc 200,000 - Ghc 10,000 = Ghc 190,000.
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In the second year, the depreciation is 5% of Ghc 190,000, which is Ghc 9,500. So, the value of the equipment after the second year is Ghc 190,000 - Ghc 9,500 = Ghc 180,500.
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In the third year, the depreciation is 5% of Ghc 180,500, which is Ghc 9,025. So, the value of the equipment after the third year is Ghc 180,500 - Ghc 9,025 = Ghc 171,475.
So, the answer is B. Ghc 171,475.
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