Depreciation Provisions and Reserves Test

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Depreciation Provisions and Reserves Test - 13

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Weekly Quiz Competition

Question 1
1 / -0

_________ cost will still be incurred although a plant is shut down temporarily.

A
Cost of raw material

B
Advertising

C
Depreciation

D
Carriage

Solution

To have a true and fair view of profit & loss of the organization, depreciation of the assets has to be charged on the basis of their useful life. If a plant is shut down temporarily, there may be significant spoilage of material in the process, some significant damage to the plant. Due to some reasons like lack of demand, maintenance of plant, the plant is shut down for some time. The shutdown does not change the inherent technical nature of the plant. Hence depreciation has to be charged.
Question 2
1 / -0

Which one of the following statements is correct?

A
Depreciation is not the process of valuation of asset-it is a process of allocation of cost of asset to the period of its economic life.

B
If the cost of machinery is more than the book value, then depreciation need not be provided.

C
When the plant and machinery and maintained in good condition, through repairs and renewals, depreciation need not be provided.

D
In the absence of any legal provisions, if the auditor finds that provision made for depreciation is inadequate, then he is not required to refer to it in his report.

Solution

Option A is Correct One.
Depreciation is technically a method of allocation, not valuation, even though it determines the value placed on the asset in the balance sheet. Any business or income producing activity using tangible assets may incur costs related to those assets.

Question 3

1 / -0

Match List-I with List-II and select the correct answer using the codes given the lists.

List-I	List-II
I. Amortisation	(a) Diminition in the life of the assets due to excessive use
II. Depreciation	(b) Exhaustion of natural resource
III. Depletion	(c) Expiration of tangible assets
IV. Obsolescence	(d) Expiration of intangible assets
	(e) Economic deterioration due to improved inventions

I-(a), II-(b), III-(c), IV-(d)

I-(a), II-(b), III-(d), IV-(e)

I-(e), II-(b), III-(c), IV-(d)

I-(d), II-(c), III-(b), IV-(e)

Solution

1. Amortization is used for expiration of intangible assets.

2. Depreciation is used for expiration of tangible assets.

3. Depletion allocates the cost of associated with using an assets , in case reduction of a natural resources.

4. Obsolescence means economic deterioration due to improved invention i.e older version has passed and a new version was already on the market. So, here the D option is right answer.

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

Accumulated depreciation account is shown in the final accounts:

A
On the liability side of the balance sheet.

B
On the debit side of the profit and loss account.

C
By deducting from the related asset account in the balance sheet.

D
On the credit side of the profit and loss account.

Solution

The accumulated depreciation account is an asset account with a credit balance (also known as a contra asset account); this means that it appears on the balance sheet as a reduction from the gross amount of fixed assets reported.
Question 6
1 / -0

Which of the following is/are capitalised along with the purchase price a fixed asset?
I. Import duty
II. Delivery and handling cost
III. Cash discount
IV. Cost of installation
Select the correct answer using the codes given.

A
III only

B
II and III

C
I, II and IV

D
I, II, III and IV
Solution
Expenditure incurred up to the date at which the asset becomes ready to commence commercial production ( i.e. production intended for sale or capitative consumption) should be capitalized and expenditure incurred after this cut off date should be treated as revenue expenditure. Examples of such expenses to be capitalized include :
Freight & in- transit Insurance
Import duties and other non-refundable taxes
Cartage and Carriage Expenses
Site preparation cost
Installation cost
Professional fees for Architects and engineers
Expenditure incurred on test runs and experimental production
Borrowing cost incurred up to the date at which substantially all the activities necessary to prepare the qualifying asset for its intended use are complete.
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

The permanent, continuing and gradual shrinkage in the book value of a fixed assets is called _______.

A
Appreciation

B
Depreciation

C
Reduction

D
Computation

Solution

The monetary value of an asset decrease over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.

Question 10

1 / -0

Match List-I with List-II and select the correct answer using the codes given the lists.

List-I	List-II
I. Uncertain liability	(a) Amortisation
II. Expiry of tangible asset	(b) Long-term liability
III. Basis for all valuations in the balance sheet	(c) Research and development
IV. Accounting standard-As-$$8$$	(d) Estimated obligation
	(e) Conservation convention

I-(e), II-(a), III-(b), IV-(c)

I-(d), II-(c), III-(e), IV-(a)

I-(e), II-(c), III-(d), IV-(a)

I-(d), II-(a), III-(e), IV-(c)

Solution

Option D is the Correct one.

AS 8 - Accounting for Research & Development
Amortization: the action or process of gradually writing off the initial cost of an asset.

Provisions are present obligations or liabilities but with uncertain amounts. The amounts can only be measured with a substantial estimation. Contingent liabilities are possible obligations.

This accounting convention is generally expressed as to “anticipate all the future losses "

This convention generally applies to the valuation of current assets as they are basis for preparing financial statements to facilitate comparison of financial statements on period to period basis.

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Depreciation Provisions and Reserves Test - 13

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Depreciation Provisions and Reserves Test - 13

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SHARING IS CARING

Question 1

Cost of raw material

Advertising

Depreciation

Carriage

Solution

Question 2

Depreciation is not the process of valuation of asset-it is a process of allocation of cost of asset to the period of its economic life.

If the cost of machinery is more than the book value, then depreciation need not be provided.

When the plant and machinery and maintained in good condition, through repairs and renewals, depreciation need not be provided.

In the absence of any legal provisions, if the auditor finds that provision made for depreciation is inadequate, then he is not required to refer to it in his report.

Solution

Question 3

I-(a), II-(b), III-(c), IV-(d)

I-(a), II-(b), III-(d), IV-(e)

I-(e), II-(b), III-(c), IV-(d)

I-(d), II-(c), III-(b), IV-(e)

Solution

Question 4

Fixed installment method

Annuity method

Diminishing balance method

Insurance policy method

Solution

Question 5

On the liability side of the balance sheet.

On the debit side of the profit and loss account.

By deducting from the related asset account in the balance sheet.

On the credit side of the profit and loss account.

Solution

Question 6

III only

II and III

I, II and IV

I, II, III and IV

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

Appreciation

Depreciation

Reduction

Computation

Solution

Question 10

I-(e), II-(a), III-(b), IV-(c)

I-(d), II-(c), III-(e), IV-(a)

I-(e), II-(c), III-(d), IV-(a)

I-(d), II-(a), III-(e), IV-(c)

Solution

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