Depreciation Provisions and Reserves Test

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Depreciation Provisions and Reserves Test - 19

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Question 1
1 / -0

Account appear under Use of Asset Disposal Account are ____________________.

A
Original cost of the asset

B
Sale price of the asset

C
Value of the parts of the asset retained for use

D
All of the above
Solution
Option D is the correct one.
1. No proceeds, fully depreciated. Debit all accumulated depreciation and credit the fixed asset.
2. Loss on sale. Debit cash for the amount received, debit all accumulated depreciation, debit the loss on sale of asset account, and credit the fixed asset.
3. Gain on sale.
Question 2
1 / -0

The balance of asset disposal account is transferred to __________.

A
Trading account

B
Profit and loss account

C
Balance sheet

D
None of the above

Solution

Here the B option is right answer.
When the asset is sold at the end of its useful life, the sale proceeds should be credited the asset account. The profit or loss on sale or disposal of the assets is transferred to the P&L a/c.
Question 3
1 / -0

According to ________ useful life of an asset is normally the period over which it is expected to be used.

A
AS 3

B
AS 6

C
AS 2

D
AS 4

Solution

Option B is correct One.
According to AS 6
(i) the period over which a depreciable asset is expected to be used by the enterprise; or
(ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise.
Question 4
1 / -0

Which of the following is not the cause for depreciation _______________.

A
Wear and tear

B
Expiration of legal rights

C
Obsolescence

D
None of the above

Solution

The main causes of depreciation include the following :
1. Physical wear and tear - When the fixed assets are put to use, the value of such assets may decrease. Such decrease in the value of assets is said to be due to physical wear and tear.
2. Within the passage of time - When the assets are exposed to the forces of nature like weather, winds, rains, etc. the value of such assets may decrease even if they are not put to any use.
3. Expiration of legal rights - When the use of an asset is governed by the time bound arrangement, the value of such assets may decrease with the passage of time.
Question 5
1 / -0

Additional asset is Depreciated from _______.

A
Beginning of the year

B
Ending of the year

C
The addition made

D
The date addition proposed

Solution

Depreciation is charged on the book value of the machine at the beginning of the year. If any new machinery purchased during the year, the depreciation is charged on pro rata basis for the months for which asset is used.

For example, if a machine is purchased on 1/10/2017, than depreciation will be charged for 6 months i.e. from 1/10/2017 to 31/03/2018.
Question 6
1 / -0

Creation of reserves ______ the amount of profits available for distribution among the owners of the business.

A
Neutralize

B
Increase

C
Reduces

D
None of the above

Solution

Reduces.
Reserves are the amounts set aside out of profits. It is an appropriation of profits or accumulated profits to strengthen the financial position of the business. Reserves are not set aside to meet a liability or depreciation in the value of assets but is set aside to meet known or unknown contingency that may arise in future. For e.g., General Reserve, Reserve for Expansion etc.
it is created as a matter of prudence out of profits and hence creation of reserves reduces the amount of profits available for distribution among the owners of the business.
Question 7
1 / -0

Depreciation also has compliance with _____.

A
Law

B
Sales tax

C
VAT

D
None of the above
Solution
Law.
Depreciation is Constrained by Legal Requirements.
One of the most important provisions of the Act for Companies as well as the auditors to consider is the new method of the calculating depreciation as per Schedule II Part C of the Companies Act 2013.
Important Points:
Here is a list of important points to remember while calculating Depreciation as per New Companies Act 2013:

Schedule II of the Companies Act 2013 for calculating depreciation is applicable only on tangible assets. For calculating Depreciation on intangible assets, the companies have to follow the applicable accounting standards.

Depreciation as per Companies Act 2013 depends on the useful life of various assets as defined in the Schedule II to the Companies Act 2013

Rates of depreciation depend on the useful life of assets. No separate rates of depreciation are defined in the Act.

95% of the original cost of the asset has to be depreciated

5% is the residual value of assets prescribed as per schedule II of the Companies Act 2013. The residual value of asset is to be calculated on the original cost of the Asset

The useful life of various assets as given in schedule II is mandatory to be followed. If a Company does not follow such useful life then it has to submit a technical report substantiating the useful life taken by it. Also, a disclosure mentioning a different useful life to that prescribed in the Act is used by the Company is mandatory

Date of purchase is most important to calculate the remaining useful life of the asset as on 01.04.2014. Existing assets are to be depreciated over the remaining useful lives as on 01.04.2014. Date of purchase can be found in the fixed asset register or the depreciation chart of the company and can also be available in the tax audit report of the Company for various years

If the life of the asset as on 01.04.2014 is already more than useful life as prescribed in Schedule II, then no depreciation can be charged after 01.04.2014. However, an amount equal to the (WDV-Residual value) has to be written off from either the P&L A/c or from the retained earnings of the Company in the FY 2014-15

During the transitional year i.e. FY 2014-15, The Company cannot change its method of calculating depreciation from WDV to SLM or vice-versa. Any change by the company in the method of calculating depreciation will amount to change in accounting policy as per AS-5. The calculation of the impact of such change on the Statement of Profit & Loss has to be disclosed by the company in its financial statements

The rate of depreciation becomes 1.5 times & 2 times of the normal rates in case of double shifts and triple shifts respectively

Charging depreciation is mandatory if the company wants to declare dividend or for payment of managerial remuneration. Charging depreciation is also mandatory as per the applicable accounting standards in order to give a true & fair view

As per ICAI guidance note, if the value of the asset is up to Rs. 5000/- then it can be fully depreciated.
Question 8
1 / -0

As per __________ Depreciation is an expense incurred in normal course of business.

A
Matching Concept

B
Cost concept

C
Dual aspect

D
None

Solution

Matching concept.
Depreciation is defined as the expensing of the cost of an asset involved in producing revenues throughout its useful life.

Depreciation and the matching principle

Depreciation expense reduces an accounting period’s income even though the expense does not require a cash or credit payment. The reason for the expense is to comply with the matching principle required by accrual accounting. According to the principle, expenses are recognized regardless of cash payment when obligations are:

1. Incurred (usually when goods are transferred (sold) or services rendered),

2. Generated by expenses involved in the earning of the accounting period’s revenues.
Question 9
1 / -0

Cost of Asset = Purchase price + __________.

A
Expenses

B
Repairs

C
Incidental expenses

D
None
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 bed capitalized and expenditure incurred after this cut off date should be treated as revenue expenditure.
Cost of assets includes :
Freight and in-transit Insurance
Import duties and other non-refundable taxes
Cartage and carriage expenses
Site preparation costs
Installation costs, such as special foundation or plant
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 10
1 / -0

Give Journal Entry for:
Bad debts debited to profit and loss account.

A
Profit & Loss A/c Dr.

To Bad debts A/c

B
Profit and Loss A/c Dr.

To Provision for doubtful debts A/c

C
Bad debts A/c Dr.

To Sundry debtors A/c

D
None of the above

Solution

Amount which is not recoverable from the debtors is called bad debts. Bad debts is a loss for the organization and should be debited to profit & loss account. Following journal entry will be passed:

Profit & Loss A/c Dr.
To Bad Debts A/c

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Re-Attempt Weekly Quiz Competition

Depreciation Provisions and Reserves Test - 19

Result

Depreciation Provisions and Reserves Test - 19

Score

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Rank

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SHARING IS CARING

Question 1

Original cost of the asset

Sale price of the asset

Value of the parts of the asset retained for use

All of the above

Solution

Question 2

Trading account

Profit and loss account

Balance sheet

None of the above

Solution

Question 3

AS 3

AS 6

AS 2

AS 4

Solution

Question 4

Wear and tear

Expiration of legal rights

Obsolescence

None of the above

Solution

Question 5

Beginning of the year

Ending of the year

The addition made

The date addition proposed

Solution

Question 6

Neutralize

Increase

Reduces

None of the above

Solution

Question 7

Law

Sales tax

VAT

None of the above

Solution

Question 8

Matching Concept

Cost concept

Dual aspect

None

Solution

Question 9

Expenses

Repairs

Incidental expenses

None

Solution

Question 10

Profit & Loss A/c Dr. To Bad debts A/c

Profit and Loss A/c Dr. To Provision for doubtful debts A/c

Bad debts A/c Dr. To Sundry debtors A/c

None of the above

Solution

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Profit & Loss A/c Dr.

To Bad debts A/c

Profit and Loss A/c Dr.

To Provision for doubtful debts A/c

Bad debts A/c Dr.

To Sundry debtors A/c