Depreciation Test 1

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Depreciation Test 1

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Question 1
1 / -0

Which method of depreciation is suitable when expenditure on repairs and maintenance increases as the machine grows old?

A
Reducing Balance Method

B
Straight Line Method

C
Machine Hour Rate Method

D
Sinking Fund Method.

Solution

Under this Reducing balance method, depreciation will be calculated at a certain percentage each year on the balance of the asset which is brought forward from the previous year. Every year the installment of depreciation will reduce as the beginning balance of the asset in each year will reduce. It is usually adopted for plant and machinery.
Hence, this method is suitable when expenditure on repairs and maintainence increases as machine grows old.
Question 2
1 / -0

For depreciation mines, the suitable method is:

A
Straight Line

B
WDV

C
Depletion

D
Annuity Method

Solution

Depletion method is used for charging the depreciation on Natural resources such as mines, quarries etc.
Question 3
1 / -0

An asset is never reduced to zero in the _______________.

A
Fixed instalment method.

B
Reducing balance method.

C
Annuity method.

D
Sum of years method.

Solution

Under reducing balance method of Depreciation, Depreciation is calculated at the fixed rate on the reducing balance of the asset therefore, the value of an asset is never zero under this method
Question 4
1 / -0

The amount of depreciation charged to Profit and Loss Account varies every year under _________.

A
Fixed installment method

B
Annuity method

C
Diminishing balance method

D
Insurance policy method

Solution

Depreciation is provided on fixed assets on account of wear and tear of the asset by using them.
Depreciation is provided on assets based on the useful life of the assets. Various methods are used to provide the depreciation which included the straight-line method and the written down value method.
Under the diminishing balance method, depreciation charged to the profit & loss account every year will differ as the value on which depreciation is calculated will also reduce every year.
Question 5
1 / -0

If the total charge of depreciation and maintenance is considered as the method which would provide a uniform charge is?

A
Annuity method

B
Straight line method

C
Diminishing balance method

D
Insurance policy method

Solution

Straight line method of depreciation charges uniform or equal amount of depreciation every year on the fixed assets. Under this method, the original cost less residual value of the asset is distributed over the estimated useful life of the asset.
Thus, at the end of the useful life of the asset , the value of the asset becomes Nil in the books of accounts.
Question 6
1 / -0

The amount of depreciation under straight line method vis-vis written down value method, when the rate of depreciation is same, would be:

A
Equal in all years

B
Equal in the first year but higher is subsequent years

C
Equal in the first year but lower in subsequent years

D
Lower in the first year but equal in subsequent years

Solution

There are two most commonly used method of depreciation i.e., the Straight-line method and the written down value method.

Under the straight-line method of depreciation, a fixed and equal amount of depreciation, calculated at a fixed percentage on the original cost of a fixed depreciable asset is written off during each accounting period over the expected useful life of the asset.

Under the written down value method, depreciation calculated at a fixed percentage on the original cost (in the first year) and on the written down value, (in subsequent years) of a fixed depreciable asset is written off during each accounting period over the expected useful life of the asset.
Under this method, the rate of depreciation remains constant year after year whereas the amount of depreciation goes on decreasing.
From the above definitions, it is concluded that depreciation under SLM and WDV when the rate of depreciation is the same, would be equal in the first year but higher in subsequent years.
Question 7
1 / -0

A company has bought patents. Which of the following methods is most suitable for providing depreciation on them?

A
SLM

B
WDV

C
Sum of year digits

D
Any of the above

Solution

The simplest way of calculating depreciation for patents is the straight-line method.
Under the Straight Line Method, Depreciation is charged on the original cost of the asset.
It is considered a simple method as the same amount of depreciation is charged each year.
Question 8
1 / -0

Under which of the following methods of depreciation, amount of depreciation varies every year

A
Written Down Value Method

B
Straight Line Method

C
Amount of depreciation does not vary on year to year basis

D
None of the above

Solution

Under Written Down Value Method of depreciation, the amount of depreciation varies every year as depreciation is charged on the reduced value of the asset.
Question 9
1 / -0

An asset is purchased for Rs. 50,000 on which depreciation is to be provided annually according to the straight line method. The useful life to the asset is 10 years and the residual value is Rs. 10,000. The rate of depreciation is?

A
20%

B
18%

C
10%

D
8%

Solution

Depreciation = (Cost price - scrap value)/ Useful life of an asset
Rate of depreciation = Depreciation value/ Cost price of asset
Where,
Cost price = Rs. 50,000, Scrap value = Rs. 10,000, Useful life of asset = 10 years
Depreciation = Rs. (50000 - 10000)/ 10 years
Depreciation = Rs 4000
Rate of depreciation = Rs. (4000 / 50000) * 100
Rate of depreciation = 8%
Question 10
1 / -0

Under the __________ method of charging depreciation , depreciation is calculated on original cost.

A
Straight line

B
Diminishing balance

C
Annuity

D
Insurance policy

Solution

Straight line method of depreciation is the one where the rate of depreciation for every year is charged on the original cost of the asset.
The formula for calculating the amount of depreciation under straight line method is also based on the original cost as follows:
Depreciation = (Original Cost - Residual value) / Useful life.

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Depreciation Test 1

Result

Depreciation Test 1

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SHARING IS CARING

Question 1

Reducing Balance Method

Straight Line Method

Machine Hour Rate Method

Sinking Fund Method.

Solution

Question 2

Straight Line

WDV

Depletion

Annuity Method

Solution

Question 3

Fixed instalment method.

Reducing balance method.

Annuity method.

Sum of years method.

Solution

Question 4

Fixed installment method

Annuity method

Diminishing balance method

Insurance policy method

Solution

Question 5

Annuity method

Straight line method

Diminishing balance method

Insurance policy method

Solution

Question 6

Equal in all years

Equal in the first year but higher is subsequent years

Equal in the first year but lower in subsequent years

Lower in the first year but equal in subsequent years

Solution

Question 7

SLM

WDV

Sum of year digits

Any of the above

Solution

Question 8

Written Down Value Method

Straight Line Method

Amount of depreciation does not vary on year to year basis

None of the above

Solution

Question 9

20%

18%

10%

8%

Solution

Question 10

Straight line

Diminishing balance

Annuity

Insurance policy

Solution

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