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Depreciation Provisions and Reserves Test - 16

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Depreciation Provisions and Reserves Test - 16
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  • Question 1
    1 / -0
    Under written down value method the depreciation amount ___________________ every year.
    Solution
    Depreciation is provided on fixed assets on account of were and tear of the asset by suing them. Depreciation is provided on assets based on the useful life of the assets. 

    Written down value method is that when the depreciation is charged  every year on the balance value of the assets after charging the previous year depreciation. It is also know as diminishing balance method.  Under this method the depreciation amount changes every year.

    For example:

    Cost of an assets                                    Rs.10000
    Depreciation for year I @10%                 Rs.1000
                                                                 ----------------------
    Written down value                               Rs.9000
    Depreciation for year II @10%              Rs. 900
                                                                  -------------------
    Written down value                              Rs.8100
    Depreciation for year III @ 10%           Rs.   810
                                                                --------------
    And so on..              
  • Question 2
    1 / -0
    The depreciation amount in straight line method remains _____________________ for every year.
    Solution
    Under Straight line method , a fixed and equal amount is charged as depreciation every year during the life time of asset. The depreciation under this method is a fixed amount every year. This amount is such that the book value of the asset  may become zero at the end of its useful life. 

    Depreciation is calculated by the below formula:

    Depreciation= Cost of Asset-Estimated scrap value
                                 Estimated useful life of asset
  • Question 3
    1 / -0
    ___________ is created out of revenue profits from business operations.
    Solution
    Revenue profit means Profit earned in normal course of business and reserve created out of this undistributed profits are called revenue reserves.
  • Question 4
    1 / -0
    _________ are known as an amount kept aside and retained in the business for future needs.
    Solution
    Reserves are appropriations against profits, they are created from profits for future applications. Net profit at the end of the year is transferred in specific proportions to Reserves keeping a side this parts of profits.
  • Question 5
    1 / -0
    Straight Line method is suitable for those assets whose useful life can be estimated _____________.
    Solution
    The assets whose usage life is estimated on reliable terms can under go straight line method for calculating depreciation. As the constant depreciation value every year, under this method will turn the asset value to nil at the end of its life.
  • Question 6
    1 / -0
    ____________ is created out of capital profits arising from non operating activities.
    Solution
    The capital reserve is the reserve which is created out of the profits of the company generated from its non-operating activities during a period of time and is retained for the purpose of financing the long term project of the company or write off its capital expenses in future.
  • Question 7
    1 / -0
    A reserve is a ______________ against Profits.
    Solution
    Distribution of Profits against a reserve head to meet future needs are called appropriations. Eg. General Reserve, Revenue Reserve. 
  • Question 8
    1 / -0
    The straight line method is based on __________________ assumption of same amount.
    Solution
    Faulty.
    The main drawback of the straight line method of charging depreciation is that the amount in the later years is high when the utility of the asset is reduced. This method does not recognize the fact that in the initial years of life of the asset, the repairs and maintenance cost is less, which goes on increasing gradually with the progressing life of an asset. According to this method, the amount of depreciation does not variate over the life of the asset, which is a wrong or fault assumption.
  • Question 9
    1 / -0
    ________ can be freely utilised by the management for any purpose.
    Solution
    General Reserve is a Divisible Profit which is created without any specific purpose its a Free Reserve hence the management use its for any appropriate need.
  • Question 10
    1 / -0
    Under written down value method it is ______________________ to ascertain a suitable rate of depreciation.
    Solution
    Rate of depreciation may depend on various factors like Life, cost, use, working conditions. 
    Hence, it is bit difficult to estimate the rate of depreciation under written down value method.
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