Depreciation Provisions and Reserves Test

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Depreciation Provisions and Reserves Test - 34

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Question 1
1 / -0

Consider a piece of machinery costing Rs. $30,000$ with an estimated life of 10 years. At the end of this time it can be sold for Rs. $3,000$ . Using the equal installment method the annual charge against profits would be ________.

A
$Rs.3,300$

B
$Rs.3,000$

C
$Rs.2700$

D
$Rs.300$

Solution

Calculation of depreciation when scrap value and estimated useful life of asset is given or under equal installment method:
Depreciation = (Cost of asset - Scrap Value)/ Estimated useful life
Depreciation = Rs. (30000 - 3000) / 10 years
Depreciation = Rs. 27000 / 10 years = Rs. 2700

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Question 2
1 / -0

Plant asset are depreciated over their useful lives. Which basic principle of accounting does this procedure reflect?

A
Historical cost.

B
Matching expenses with revenue.

C
Consistency.

D
Objectivity.

Solution

Matching expenses with revenue.

The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset’s cost is usually allocated to the years in which the asset is used. Depreciation systematically allocates or moves the asset’s cost from the balance sheet to expense on the income statement over the asset’s useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset.

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Question 3
1 / -0

Which of the following statements is/are false?
I. The term 'depreciation', 'depletion' and 'amortization' have same meaning
II. Provision for depreciation A/c is debited when provision for depreciation is created.
III. The main purpose of charging the Profit and Loss A/c with the amount of depreciated is to spread the cost of an asset over its useful life.

A
Only (I)

B
Only (II)

C
Only (III)

D
All (I), (II) and (III)

Solution

Provision for depreciation has credit balance. Therefore, it should be credited when it is created.

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Question 4
1 / -0

The portion of the acquisition cost of the asset, yet to be allocated is known as ___________.

A
Written down value

B
Accumulated value

C
Realised value

D
Salvage value

Solution

Written down value.

Written-down value is the value of an asset after accounting for depreciation or amortization. It is calculated by subtracting accumulated depreciation or amortization from the asset's original value, and it reflects the asset's present worth from an accounting perspective.
It is that value of asset on which depreciation has not yet been charged and can be seen in balance sheet as net book value of asset.

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Question 5
1 / -0

A Company purchased a machinery on April 01, 2000 for Rs $1,50,000$ . It is estimated that the machinery will have a useful life of 5 years after which it will have no salvage value. The depreciation charged during the year 2004-05 was ______________.

A
Rs. $50,000$

B
Rs. $40,000$

C
Rs. $30,000$

D
Rs. $10,000$

Solution

Option C is correct.
In straight line method, depreciation charged remains same for every year. Depreciation is calculated as:
Cost price - salvage value / Estimated life of depreciation
1,50,000 - 0 /5
= 30,000
Depreciation charged every year = 30,000.

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Question 6
1 / -0

Original cost of an asset was Rs. $2,52,000$ . Salvage value was $12,000$ . Depreciation for 2nd year @ $10$ % p.a under WDV method will be

A
$21,600$

B
$22,680$

C
$30,000$

D
$28,000$

Solution

Calculation of depreciation under WDV method :
Original cost of asset 252000
Less : Depreciation for first year @ 10% (25200) WDV of asset in second year 226800
Less : Depreciation for second year @ 10% (22680)
WDV of asset in third year 204120
Thereore depreciation of asset at the of second year of cost Rs. 252000 @ 10% is Rs. 22680.

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Question 7
1 / -0

The cost of a machine is Rs. $2,000$ . Two years later the book value is Rs. $1,000$ . The straight-line percentage depreciation is _________.

A
$50$ %

B
$33-1/3$ %

C
$25$ %

D
$20$ %

Solution

Under straight line method of depreciation, an equal amount is written off every yesr during the working life of an asset so as to reduce the cost of thee asset to nil or its residual value at the end of its useful life.
Under this method, the amount of depreciation is constant throughout the useful life of the asset.
Hence, in the above question :
Cost of machine = Rs. 2000
Book value after 2 years = Rs. 1000
Depreciation for two years = Rs. 1000
Depreciation for 1 year = Rs 1000 /2 = Rs. 500
SLM depreciation rate = (Straight Line Depreciation/Cost of asset) * 100
SLM depreciation rate = (Rs.500/Rs. 2000) * 100
SLM depreciation rate = 25%

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Question 8
1 / -0

Original cost of an asset was Rs. $1,00,000$ . Life 5 years. Expected salvage value was Rs. 5,000. Hence Depreciation for 3rd year as per straight line method is ___________.

A
Rs. $8,550$

B
Rs. $20,000$

C
Rs. $19,000$

D
Rs. $26,250$

Solution

Option C is correct. In straight line method, depreciation charged remains same for every year. Depreciation is calculated as:
Cost price - salvage value / Estimated life of depreciation
1,00,000 - 5000 /5
= 19000
Depreciation for 3rd year will be - 19000.

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Question 9
1 / -0

Amit Ltd. purchased a machine on $01.01.2003$ for Rs. $1,20,000$ . Installation expenses were Rs. $10,000$ . Residual value after $5$ years Rs. $5,000$ . On $01.07.2003$ , expenses for repairs were incurred to the extent of Rs. $2,000$ . Depreciation is provided under straight line method. Depreciation rate is $10\%$ Annual Depreciation will be ____________.

A
Rs. $13,000$

B
Rs. $17,000$

C
Rs. $21,000$

D
Rs. $25,000$
Question 10
1 / -0

The main purpose of depreciation accounting is to _____________.

A
charge the cost of asset

B
allocate the cost of the asset over its estimated useful life

C
provide for replacement of the asset on the expiry of is useful life

D
value the assets on the closing date of the year

Solution

It is necessary to distribute the cost of a fixed asset, less the scrap or salvage value after the useful life of the asset is over, in such a way so as to allocate it as equitably as possible to the periods during which the benefits are received from the use of fixed assets. This system of procedure is called depreciation accounting.

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Depreciation Provisions and Reserves Test - 34

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Depreciation Provisions and Reserves Test - 34

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Question 1

Rs.3,300Rs.3,300Rs.3,300

Rs.3,000Rs.3,000Rs.3,000

Rs.2700Rs.2700Rs.2700

Rs.300Rs.300Rs.300

Solution

Question 2

Historical cost.

Matching expenses with revenue.

Consistency.

Objectivity.

Solution

Question 3

Only (I)

Only (II)

Only (III)

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

Solution

Question 4

Written down value

Accumulated value

Realised value

Salvage value

Solution

Question 5

Rs. 50,00050,00050,000

Rs. 40,00040,00040,000

Rs. 30,00030,00030,000

Rs. 10,00010,00010,000

Solution

Question 6

21,60021,60021,600

22,68022,68022,680

30,00030,00030,000

28,00028,00028,000

Solution

Question 7

505050%

33−1/333-1/333−1/3%

252525%

202020%

Solution

Question 8

Rs. 8,5508,5508,550

Rs. 20,00020,00020,000

Rs. 19,00019,00019,000

Rs. 26,25026,25026,250

Solution

Question 9

Rs. 13,00013,00013,000

Rs. 17,00017,00017,000

Rs. 21,00021,00021,000

Rs. 25,00025,00025,000

Question 10

charge the cost of asset

allocate the cost of the asset over its estimated useful life

provide for replacement of the asset on the expiry of is useful life

value the assets on the closing date of the year

Solution

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$Rs.3,300$

$Rs.3,000$

$Rs.2700$

$Rs.300$

Rs. $50,000$

Rs. $40,000$

Rs. $30,000$

Rs. $10,000$

$21,600$

$22,680$

$30,000$

$28,000$

$50$ %

$33-1/3$ %

$25$ %

$20$ %

Rs. $8,550$

Rs. $20,000$

Rs. $19,000$

Rs. $26,250$

Rs. $13,000$

Rs. $17,000$

Rs. $21,000$

Rs. $25,000$