Depreciation Provisions and Reserves Test

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Depreciation Provisions and Reserves Test - 33

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Weekly Quiz Competition

Question 1
1 / -0

Which of the following statements is/are false?
(1) Depreciation provision is at the discretion of the management.
(2) Depreciation is a charge against profit.
(3) Depreciation is provided only when there is profit.
(4) Depreciation is an appropriation of profit.

A
1, 2 and 3

B
1, 3 and 4

C
1, 2 and 4

D
2, 3 and 4

Solution

Depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy. It is a mandatory deduction in the profit and loss statements of an entity. It is a charge against profit, and not an appropriation of profit, as it is charged regardless of whether there is profit or loss.
Question 2
1 / -0

A ____________ is a liability which can be measured only by using a substantial degree of estimation.

A
Provision

B
Non-current liability

C
Current liability

D
Contingent liability

Solution

Provision is an amount set aside, by charging it to Profit and Loss A/c or Statement of profit and loss, to provide for a known liability, the amount of which cannot be determined with accuracy. It is charged in the profit and loss account on estimate basis. In other words, a provision is a charge against profit for the purpose of providing for any liability or loss. Provision for depreciation, provision for doubtful debts, provision for repairs are few examples of provisions.
Question 3
1 / -0

Which of the following is correct? Depreciable assets are those assets which:
(1) Are expected to be used for more than one accounting period.
(2) Have a limited useful life
(3) Are held for the purpose of re-sale
(4) None of these

A
1 and 2

B
2 and 3

C
2 and 4

D
1 and 3

Solution

Depreciable assets are those assets which
1. Are expected to be used for more than one accounting period i.e. fixed assets
2. Have a limited useful life.
Depreciation is a decrease in the value of the fixed assets due to wear and tear, obsolescence and passage of time.
Depreciation is charged only on the fixed Tangible Assets.
Question 4
1 / -0

The amount of depreciation remains constant year after year under ____________.

A
Written Down Value Method

B
Straight Line Method

C
Sinking Fund Method

D
Annuity Method

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 5
1 / -0

Obsolescence of a depreciable asset may be caused by
I. Technological changes
II. Improvement in the production method
III. Legal or other restrictions

A
Only (I)

B
Both (I) and (II)

C
All (I), (II), (III)

D
Only (III)

Solution

Obsolescence means the fact of being "out - of - date". It implies an existing asset becoming out of date on account of the availability of a better type of asset. It can be due to any factor: -
1) Technological Changes
2) Improvements in production methods
3) Change in market demand
4) Legal or other restrictions.
Question 6
1 / -0

Interest debited to asset account in which method of depreciation?

A
Annuity method

B
Depreciation fund method

C
Insurance policy method

D
Revaluation method

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 7
1 / -0

An asset was purchased for Rs. $$12,500$$ and under the reducing balance method $$20$$ 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?

A
$$Rs.8,000$$

B
$$Rs.7,500$$

C
$$Rs.6,400$$

D
$$Rs.5,000$$

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 8
1 / -0

If the equipment account has a balance of Rs. $$22,500$$ and the accumulated depreciation account has a balance of Rs. $$14,000$$, the book value of the equipment is __________.

A
$$Rs.36,500$$

B
$$Rs.22,500$$

C
$$Rs.14,000$$

D
$$Rs.8,500$$

Solution

Accumulated depreciation is the total amount of a plant asset's cost that has been allocated to depreciation expense since the asset was put into service. Accumulated depreciation is associated with constructed assets such as buildings, machinery, office equipment, furniture, fixtures, vehicles, etc.
The amount of accumulated depreciation is used to determine a plant asset's book value (or carrying value).
Book value of asset = WDV of equipment (asset) - accumulated depreciation
Book value of asset = Rs. 22500 - Rs. 14000
Book value of asset = Rs. 8500
Question 9
1 / -0

The provision for bad debts is made by crediting __________.

A
Profit and loss account

B
Debtors account

C
Provision for bad debts account

D
Trading account

Solution

The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for doubtful accounts, or Allowance for Uncollectible Accounts. In this case, the account Provision for Bad Debts is a contra asset account (an asset account with a credit balance). It is used along with the account Account receivable in order for the balance sheet to report the net realizable value of the accounts receivable.
Provision for bad debts is made by debiting profit and loss A/c and crediting provision for bad debts account.
Question 10
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.

A
1, 2 and 3

B
1 and 2 only

C
1 only

D
3 only

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.

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Depreciation Provisions and Reserves Test - 33

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Depreciation Provisions and Reserves Test - 33

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SHARING IS CARING

Question 1

1, 2 and 3

1, 3 and 4

1, 2 and 4

2, 3 and 4

Solution

Question 2

Provision

Non-current liability

Current liability

Contingent liability

Solution

Question 3

1 and 2

2 and 3

2 and 4

1 and 3

Solution

Question 4

Written Down Value Method

Straight Line Method

Sinking Fund Method

Annuity Method

Solution

Question 5

Only (I)

Both (I) and (II)

All (I), (II), (III)

Only (III)

Solution

Question 6

Annuity method

Depreciation fund method

Insurance policy method

Revaluation method

Solution

Question 7

$$Rs.8,000$$

$$Rs.7,500$$

$$Rs.6,400$$

$$Rs.5,000$$

Solution

Question 8

$$Rs.36,500$$

$$Rs.22,500$$

$$Rs.14,000$$

$$Rs.8,500$$

Solution

Question 9

Profit and loss account

Debtors account

Provision for bad debts account

Trading account

Solution

Question 10

1, 2 and 3

1 and 2 only

1 only

3 only

Solution

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