Donna had been in the taxi business for two years and had three cars which were all one year old at the start of the current year and which originally cost £38000. She depreciates her cars using the reducing balance method at a rate of 40%. What is the depreciation charge for the current year?
A) £15200
B) £22800
C) £9120
D) None of the above

Question

Quizplus · Accepted Answer

Using the reducing balance method, the depreciation charge in the first year is 40% of the original cost which is £38000 x 0.4 = £15200. This means that the value of each car at the end of the first year is £22800 (£38000 - £15200). Thus, the depreciation charge for the second year will be 40% of this new value which is £9120 (£22800 x 0.4). Therefore, the total depreciation charge for the current year will be £9120 x 3 (since she has three cars) = £27360. However, the question only asks for the depreciation charge for one car, so the answer is £9120.

Donna Had Been in the Taxi Business for Two Years