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Depreciation Test 7

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Depreciation Test 7
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  • Question 1
    1 / -0
    Interest debited to asset account in which method of depreciation?
    Solution
    Option A is correct. The Annuity method of depreciation is a process used to calculate depreciation on an asset by calculating its rate of return as if it was an investment. The annuity method assumes that the sum spent on buying an asset is an investment that should be expected to yield interest. As such, the interest is charged on the diminishing balance of the asset, It is then debited to asset account. 
  • Question 2
    1 / -0
    An asset was purchased for Rs. 12,50012,500 and under the reducing balance method 2020 percent of the reducing value of the asset is written off each year. What is the value of the asset at the end of three years?
    Solution

    Calculation of the value of asset at the end of three years under written down value method:

    Cost of the asset                                                         Rs. 12500

    Less : Depreciation @ 20%                                         Rs . (2500)

    Written down value at the end of first year               Rs. 10000

    Less : Depreciation @ 20%                                         Rs  (2000)

    Written down value at the end of second year         Rs. 8000

    Less : Depreciation @ 20%                                          Rs. (1600)

    Written down value at the end of third year              Rs. 6400

  • Question 3
    1 / -0
    Consider a piece of machinery costing Rs. 30,00030,000 with an estimated life of 10 years. At the end of this time it can be sold for Rs. 3,0003,000. Using the equal installment method the annual charge against profits would be ________.
    Solution
    Calculation of depreciation when scrap value and estimated useful life of asset is given or under equal installment method:
    Depreciation = (Cost of asset - Scrap Value)/ Estimated useful life
    Depreciation = Rs. (30000 - 3000) / 10 years
    Depreciation = Rs. 27000 / 10 years = Rs. 2700
  • Question 4
    1 / -0
    Which of the following is/are advantage(s) of the equal installment method?
    1. Easy to understand; calculation simple;
    2. Decreasing depreciation charges cancel out increasing repair charges;
    3. No re-calculation necessary when further assets are purchase.
    Solution
    Equal installment method - According to this method, the amount of yearly depreciation is calculated as below:
    (Cost of the asset - Scrap value) / Estimated life in years
    The only benefit of this method is that an equal amount of depreciation is charged every year throughout the life of the asset, making the calculation of depreciation and of the cost comparison easy.
  • Question 5
    1 / -0
    The amount of depreciation remains constant year after year under ____________.
    Solution
    Straight Line Method of charging depreciation - It is a method of providing depreciation under which net cost of the asset (Historical cost - realisable value) is written off equally over the useful life of the asset. In other words, under this method, a percentage of original cost of the asset is written off every year, therefore, the amount of depreciation is uniform from year to year.
  • Question 6
    1 / -0
    Original cost of a machine was Rs. 2,52,0002,52,000; Salvage value was 12,00012,000. Useful Life was 6 years, Annual depreciation under Straight Line Method will be __________.
    Solution
    Under straight line method of depreciation, depreciation expense is calculated as below:
    Depreciation = (Cost of Asset - Scrap value)/ Estimated useful life
    Depreciation = (Rs. 252000 - Rs. 12000) / 6 years
    Depreciation = Rs. 240000 / 6 years
    Depreciation =  Rs. 40000
  • Question 7
    1 / -0
    The portion of the acquisition cost of the asset, yet to be allocated is known as ___________.
    Solution

    Written down value.

    Written-down value is the value of an asset after accounting for depreciation or amortization. It is calculated by subtracting accumulated depreciation or amortization from the asset's original value, and it reflects the asset's present worth from an accounting perspective.
    It is that value of asset on which depreciation has not yet been charged and can be seen in balance sheet as net book value of asset.

  • Question 8
    1 / -0
    A Company purchased a machinery on April 01, 2000 for Rs 1,50,0001,50,000. It is estimated that the machinery will have a useful life of 5 years after which it will have no salvage value. The depreciation charged during the year 2004-05 was ______________.
    Solution
    Option C is correct.
    In straight line method, depreciation charged remains same for every year. Depreciation is calculated as:
    Cost price - salvage value / Estimated life of depreciation
    1,50,000 - 0 /5
    = 30,000
    Depreciation charged every year = 30,000.

  • Question 9
    1 / -0
    In the books of D Ltd. the machinery account shows a debit balance of Rs. 60,00060,000 as on April 1,20031, 2003. The machinery was sold on September 3030, 20042004 for Rs. 30,00030,000. The company charges depreciation @ 20%20\% p.a. on diminishing balance method. Profit/Loss on sale will be ____________.
  • Question 10
    1 / -0
    Suraj Ltd. purchased a machine on 1.1.2003 for Rs 1,20,000. Installation expenses were Rs 10,000. Residual value after 5 years Rs 5,000. On 1.7.2003, expenses for repairs were incurred to the extent of Rs 2000. Depreciation is provided under straight line method. Depreciation rate = 10%. Annual Depreciation = _________
    Solution
    Option A is the correct one.
    here rate of depreciation given as 10% p.a.
    Cost of assets 120000+Installation exp 10000=130000
    130000*10%=13000
    Note:repairs on machinery are revenue expenses not included in the cost of assets.
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