A vehicle bought for KSh 500,000 is depreciated at 20% per year on the reducing balance method. What is its net book value at the end of year 2?

Answer and explanation

Correct answer: D. KSh 320,000

  1. Step 1: Year 1 depreciation = 20% x 500,000 = 100,000, so the net book value is 400,000. Step 2. Year 2 depreciation is worked on that reduced balance: 20% x 400,000 = 80,000. Step 3. Net book value = KSh 320,000. Answer: KSh 320,000. Why not the others: KSh 300,000: That takes 20% of the original cost off twice, which is the straight-line method. KSh 400,000: That is the net book value after only one year. KSh 100,000: That is the first year's depreciation charge, not the net book value.

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