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Depreciation Provisions and Reserves Test - 29

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Depreciation Provisions and Reserves Test - 29
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  • Question 1
    1 / -0
    If the annual depreciation charge on an asset for three years is Rs. $$6000$$, Rs. $$5400$$, Rs. $$4860$$. Discuss the method of depreciation followed by the company.
    Solution
    WDV (Written Down Value) is a method of depreciation in which a fixed rate of depreciation is charged on the book value of the asset, over its useful life. The amount of depreciation goes on decreasing every year. In the given question the amount of depreciation decreased in every year hence, company is following WDV method of depreciation.
  • Question 2
    1 / -0
    Under ____________ method depreciation is calculated on book value.
    Solution
    Under reducing balance method, the depreciation is charged at a fixed rate like straight line method (also known as fixed instalment method)  But the rate of percentage is not calculated on the cost of asset as is done under fixed instalment method - it is calculated on the book value of asset.
  • Question 3
    1 / -0
    Depreciation does not depends on ___________.
    Solution
    when we calculate the depreciation, we are using the total cost of acquisition, scrap value and total estimated life in the formula.'
  • Question 4
    1 / -0
    "Any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability" is called ____________.
    Solution
    The companies act 2013, States that  "Provision usually means any amount Written off or retained by the way of providing depreciation renewal or diminution in the value of assets or retained by the way of providing for any known liability of which the amount cannot be determined with substantial accuracy.
  • Question 5
    1 / -0
    Under which method of depreciation the depreciable cost of an asset is charged to profit and loss a/c in equal proportion during the working life of the asset ?
    Solution
    b'According to the SLM method, the cost of the assets is written off equally during its useful life. Therefore, an equal amount of depreciation is charged every year throughout the useful life of an asset.'
  • Question 6
    1 / -0
    ABC Ltd. paid Rs. $$24$$ lakh for use of copy right purchased. This amount can be written off under _________ method of depreciation.
    Solution
    An Intangible asset is an asset that is not physical in nature.  Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of years. Copyrights are intangible assets as these are not physical in nature. It is the legal right of the owner. So this amount can be written off under the amortized method of depreciation. 
  • Question 7
    1 / -0
    Which of the following is one of the objection against straight line method of depreciation?
    Solution
    Under straight line method of depreciation an equal amount of depreciation is charged every year throughout the life of the asset, making the calculation of depreciation and cost of comparison easy.
    The objection against this method of depreciation is that it ignores variation in the rate of use of assets. In this method the amount of depreciation in later years is high when the utility of the asset is reduced.
  • Question 8
    1 / -0
    __________ may be defined as a sum set aside out of divisible profits ad retained in order to provide for unexpected or unknown contingencies or loss or to equalize dividends or to strengthen the financial condition of the business.
    Solution
    A reserve fund is a saving account or other highly liquid asset set aside by an individual or business to meet any future costs or financial obligations, especially those arising unexpectedly. 
  • Question 9
    1 / -0
    In which of the following cases straight line method of depreciation is not appropriate?
    Solution
    Option A is the correct one.

    The maintenance expense to fixed assets ratio allows analysts to understand the age or condition of the company's equipment. An increase to a company's repairs and maintenance expense to fixed assets ratio over time can signal aging equipment or assets that are being pushed to their operating limits.

  • Question 10
    1 / -0
    The book value of an asset on $$1-4-2013$$ is Rs. $$80,000$$. The asset is sold on $$31-12-2013$$ for Rs. $$60,000$$. If the rate of depreciation is $$15\%$$ on written down value, what is the profit and loss on sale of the Asset.
    Solution
    Book value of the asset on 1-04-13 = Rs. 80,000
    Asset sold on 31-12-13 = Rs. 60,000
    Rate of depreciation = 15% on WDV
    Asset is used for 9 months.
    Depreciation of 9 months = Rs. 80,000 x 15% x (9/12) =  Rs. 9,000
    Book value of the asset on the date of sale = Rs. 80,000 - Rs. 9,000 = Rs. 71,000
    Loss on sale of asset = Rs. 71,000 - Rs. 60,000 = Rs. 11,000
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