Depreciation Provisions and Reserves Test

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Depreciation Provisions and Reserves Test - 58

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Weekly Quiz Competition

Question 1
1 / -0

Depreciation is the process of:

A
Asset Valuation

B
Verification of assets

C
Allocation of cost of assets to the period of its life

D
Decreasing the value of asset

Solution

Depreciation accounting is a system of accounting which aims to distribute the cost of tangible capital assets, less salvage value (if any) over the estimated useful life of the unit in a systematic and rational manner. It is a process of allocation, not of valuation
Question 2
1 / -0

A machine was bought at a cost of Rs. 5 lacs on 1.1.02 During its life of 10 years it will be depreciated on SLM basis. On 31.12.08 the machine was sold for Rs. 50,000. Find out the profit/loss?

A
Loss of Rs. 1,50,000

B
Loss of Rs. 100000

C
Profit of Rs.1,00,000

D
Profit of Rs. 1,50,000

Solution

Profit/loss on Asset = Sale value of asset - WDV of asset
   = 50000 - 1,50,000
   = Loss of RS-1,00,000

Working notes:-
WDV of the asset as on 31.12.08
= Cost - depreciation for 7 years on SLM basis
= 5,00,000 - 3,50,000 ( 50,000 x 7years)
= RS-1,50,000
Depreciation on SLM basis = depreciable amount
   ------------------------------
useful life
= 5,00,000
   -------------------
10
= RS-50,000.
Question 3
1 / -0

Which of the following is Depleted?

A
Furniture

B
Goodwill

C
Machinery

D
Coal Mines

Solution

Depreciation and Depletion: In fact, the term 'depletion' is used in respect of the extraction of natural resources like quarries, and mines, that reduces the availability of quantity of the material or asset. Depreciation, as stated earlier, is a loss in value of an asset generally arising on account of wear and tear.
Question 4
1 / -0

Which method of depreciation is effective if repairs and maintenance cost of an asset increases as it grows old _________________.

A
Straight line method

B
Sinking Fund

C
Annuity

D
Reducing Balance

Solution

If there is no production from an asset, depreciation will be charged to the cost of expenses of repairs and maintenance i.e increasing as the asset grows older and This is a variant of the reducing installment or diminishing balance method. the increase in the units of production, the depreciation charge also increases.
Question 5
1 / -0

A machinery is depreciated by Rs. 2000 every year. Which method is being used to calculate depreciation?

A
Written Down value method

B
Straight line method

C
Sum of years Digit method

D
None of these

Solution

This is the earliest and one of the widely used methods of providing depreciation. This method is based on the assumption of equal usage of the asset over its entire useful life. It is called straight line for a reason that if the amount of depreciation and corresponding time period is plotted on a graph, it will result in a straight line.
It is also called fixed instalment method because the amount of depreciation remains constant from year to year over the useful life of the asset. According to this method, a fixed and an equal amount is charged as depreciation in every accounting period during the lifetime of an asset.
Question 6
1 / -0

Cost of machinery = Rs.2,52,000
Salvage value = Rs.12,000
Useful life = 6 years
Annual depreciation under straight line method will be:

A
Rs. 42,000

B
Rs. 40,000

C
Rs. 15,000

D
Rs. 28,000

Solution

Purchase Price of Machine Rs. 2,52,000 - Salvage value Rs. 12000 = Depreciable asset cost of Rs 2,40,000

6 year useful life = 1/6 depreciation rate per year
1/6 x 2,40,000 depreciable asset cost = Rs 40,000 annual depreciation
Question 7
1 / -0

In case of reducing balance method of charging depreciation is charged on the:

A
Original Cost

B
Original Cost less Scrap value

C
Market Value

D
Written Down value

Solution

The reducing balance method of depreciation results in declining depreciation charges each accounting period. In other words, more depreciation is charged at the beginning of the asset's lifetime and less is charged towards the end. This can be useful when an asset has higher utility or productivity when it is new.
Question 8
1 / -0

A machine was purchased on 1st April 2007 for Rs 5,00,000 and 1st October 2007 for Rs 2,00,000. Calculate depreciation @ 20% p.a. on written down value method for the year ending 31st March 2008.

A
Rs. 1,00,000

B
Rs. 1,40,000

C
Rs. 40,000

D
Rs. 1,20,000

Solution

Depreciation for the year 31st march 2008:-
= Existing machinery + new machinery
= 1,00,000 + 20,000
= RS-1,20,000.

Working note:-
Existing machinery = Depreciable amount x rate of depreciation
   = 5,00,000 x 20/100
   = 1,00,000
New machinery = depreciable amount x Rate of depreciation x No. of months
   = 2,00,000 x 20/100 x 6/12 (October to march)
   = RS-20,000.
Question 9
1 / -0

If the rate of depreciation is the same, then the amount of depreciation under straight line method as compare to written down value method will be:

A
Equal in all years

B
Equal in first year but higher in subsequent years.

C
Equal in the first year but lower in subsequent years.

D
Lower in the first year but equal in subsequent years.

Solution

Fixed Installment Method or Equal Installment Method or Straight Line Method or Fixed Percentage on Original Cost Method: In this method a fixed or equal amount of depreciation written off as depreciation at the end of each year, during the life time of the asset.
Written Down Value Method or Diminishing Balance Method or Reducing Balance Method: It can be calculated by a method of depreciation that is sometimes called the diminishing balance method. This accounting technique reduces the value of an asset by a set percentage each year. When selling the asset, the book value is used to help determine the minimum value for which it will be sold.
Question 10
1 / -0

X purchased a machinery on 01.04.2008 for Rs. 5,00,000. Depreciation is changed at WDV at the rate of 10% p.a. The written down value of the machinery for the year ending 31st march 2011 will be:

A
Rs. 4,50,000

B
Rs. 4,05,000

C
Rs. 3,54,500

D
Rs. 3,64,500

Solution

As per the provisions of written down value method:-

Value of depreciation for the Year 2008-2009 is 5,00,000@10% = Rs 50,000

Value of depreciation for the Year 2009-20010 is 4,50,000 (5,00,000-50,000)@10% = Rs 45,000

Value of depreciation for the Year 2010-2011 is 4,05,000 (4,50,000-45,000)@10% = Rs 40,500

Which implies that written down value of the machinery for the year ending 31st march 2011 will be Rs 3,64,500 (4,05,000-40,500).

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Depreciation Provisions and Reserves Test - 58

Result

Depreciation Provisions and Reserves Test - 58

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Question 1

Asset Valuation

Verification of assets

Allocation of cost of assets to the period of its life

Decreasing the value of asset

Solution

Question 2

Loss of Rs. 1,50,000

Loss of Rs. 100000

Profit of Rs.1,00,000

Profit of Rs. 1,50,000

Solution

Question 3

Furniture

Goodwill

Machinery

Coal Mines

Solution

Question 4

Straight line method

Sinking Fund

Annuity

Reducing Balance

Solution

Question 5

Written Down value method

Straight line method

Sum of years Digit method

None of these

Solution

Question 6

Rs. 42,000

Rs. 40,000

Rs. 15,000

Rs. 28,000

Solution

Question 7

Original Cost

Original Cost less Scrap value

Market Value

Written Down value

Solution

Question 8

Rs. 1,00,000

Rs. 1,40,000

Rs. 40,000

Rs. 1,20,000

Solution

Question 9

Equal in all years

Equal in first year but higher in subsequent years.

Equal in the first year but lower in subsequent years.

Lower in the first year but equal in subsequent years.

Solution

Question 10

Rs. 4,50,000

Rs. 4,05,000

Rs. 3,54,500

Rs. 3,64,500

Solution

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