KNOWLEDGE BANK FROM B KANAGA SABAPATHY 

LET KNOWLEDGE SPREAD

Message from B. Kanaga sabapathy 03.08.2023

DIFFERENCE BETWEEN DEPRECIATED REPLACEMENT COST & WRITTEN DOWN VALUE?

Question :
I am quite often confused with the words Depreciated Replacement Cost and Written Down Value. Can you explain with the help of an illustration?
My opinion :
Depreciated Replacement Cost is calculated on the date of valuation whereas Written Down Value is derived at the end of every financial year (i.e. as on 31st March).
DRC is the depreciated replacement cost which is replacement cost minus depreciation with respect to age and life whereas WDV is written down value which is quite often used by the chartered accountants for the purpose of income tax Act by adopting constant percentage of depreciation as prescribed under Income Tax Act.
Example :
Type of structure = Load bearing
Plinth area = 1,000 sq.ft.
Year of construction (age) = 10 years back
Amount spent for the construction = Rs. 5,00,000/- (Historic cost) at that period
Replacement unit rate of construction = Rs. 1,500/sq.ft.
• Depreciated replacment cost (DRC) : Plinth area = 1,000 sq.ft.
Replacement unit rate for construction = Rs. 1,500/sq.ft. for the same utility as on date
Replacement value – 1000 x 1500 = Rs. 15,00,000
Age = 10 years
Life assumed = 60 years
Salvage value assumed = 10%
Depreciation percentage = 10 x (100 – 10)/60 = 15%
Depreciation value – 0.15 x 15,00,000 = Rs. 2,25,000
Depreciated value or Depreciation = Rs. 12,75,000/-
Replacement cost or Net present value=15,00,000 – 2,25,000

• Written down value (WDV) :
A = P( 1 – r/100)^n= 5,00,000 91 – 5/100)^10 = 5,00,000
(95/100)^ 10
= 5,00,000 (0.95)^10 = 5,00,000 x 0.598
WDV = Rs. 2,99,368/-

With best wishes,

B. KANAGA SABAPATHY
[email protected]
www.bkanagasabapathy.com

About the Author:-