Question

The depreciation on an asset purchased through hire purchase should be:
A) Based on the total cost including interest
B) Based on the cost price of the asset only
C) Should be straight line only
D) No depreciation should be provided until final payment is made

Answer 1

Hint:We have given the basic condition on an asset so we will use it to conclude the answer. We will consider the basic definitions of each term involved and then we will also study each option one by one. We will then eliminate the wrong options based on the knowledge of the definitions.

Complete step-by-step answer:
First, we will understand what the depreciation means.
Depreciation is defined as the reduction in the value of an asset over time due in particular to wear and tear.
In case of the currencies it is defined as the decrease in the value of a currency with respect to any other currency.
It is given that the asset is purchased on hire purchase.
Hire purchased is defined as a system by which one pays for a thing in this case asset, in regular instalments while having the use of it.
That means one is always using the asset so we can only use the cost price of the asset to calculate the depreciation.
Therefore, the depreciation on an asset purchased through hire purchase should be Based on the cost price of the asset only.

So, the correct answer is “Option B”.

Note:Here this is a theory-based problem. There is no calculation involved so we will just use the definition of the known terms in the given data. Going through the options is always helpful in such cases. If one has a proper grasp of the theory then this problem can be answered by just looking at it.