Q.Which formula is used to compute Annuity Factor ?

When repairs increase as an asset grows older, the Reducing balance method is efficient — option (b).

Why reducing balance (WDV)?

• The reducing balance / written down value method charges depreciation at a fixed percentage on the diminishing book value, so the depreciation amount is large in early years and small in later years.
• Repairs and maintenance behave the opposite way — they are small when the asset is new and grow larger as it ages.
• Combined, the two roughly offset each other, giving an approximately uniform total charge (depreciation + repairs) to the Profit & Loss Account each year. This even burden on profits is the practical merit of the method.

Why not the others? …

The reducing (diminishing/written-down value) balance method suits an asset whose repairs rise with age, because its depreciation charge falls each year and balances the rising repairs. The correct answer is option (d).

Repairs and maintenance of most assets increase as they grow older. To keep the total cost of using the asset (depreciation + repairs) roughly constant each year, the depreciation charge should be:

• High in the early years (when repairs are low), and
• Low in the later years (when repairs are high). …

Only "Indian Income Tax Act – 1961" is correctly matched; the other three pairs are wrong.

Evaluating each pair:

• (a) Bad debt – Creditor — wrong. Bad debt is an irrecoverable amount owed by a debtor, not a creditor.
• (b) Depreciation – Trading Account — wrong. Depreciation is an expense debited to the Profit and Loss Account, not the Trading Account.
• (c) Indian Income Tax Act – 1961 — correct. The Income Tax Act governing income tax in India was enacted in 1961. (It is this Act that prescribes the written-down-value basis of depreciation for tax purposes.) …

Under the written down value method the depreciation amount decreases every year, so the answer is (a).

In the written down value (WDV) or diminishing balance method, a fixed percentage rate is applied not to the original cost but to the book value (written down value) at the beginning of each year. Because part of the value is written off each year, the base on which the rate is applied keeps shrinking, so the rupee amount of depreciation falls year after year.

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