Depreciation Provisions and Reserves Test - 71

The market value of the asset is not considered in the calculation of depreciation under the Straight Line Method. Depreciation is based on the cost of the asset, its salvage value, and its useful life.

Revenue profits are available for distribution of dividend. Dividend equalisation reserve is one such reserve created out revenue profits.

Depreciation is charged on the assets to show that the valued of the assets keep decreasing year after year. Hence depreciation charged will decrease the book value of the fixed assets.

In the ordinary course land has a value appreciation that is the value of the land increases year after year and hence normally depreciation is not charged on Land.

In case of a purchase of fixed asset, the expenses incurred up to the installation and usage of the asset are added to the purchase cost of the asset. Hence installation charges, freight and transport expenses form a part of the acquisition cost.

General reserve is the amount set aside of the revenue profits for no specific purpose. They can be utilised for any future contingencies of the business.

Depreciation involves the decline in the value of an asset over time, reflecting its diminishing worth due to factors like wear and tear.

Under the diminishing balance method, the depreciation expense decreases every year because it is calculated as a fixed percentage of the remaining book value of the asset. As the asset's value decreases each year, the depreciation expense also decreases. 

Capital reserves are the reserves which are created out of the capital profits which are not available for distribution as dividend.

Depreciation is primarily caused by wear and tear, obsolescence, and other factors affecting the condition and value of an asset, not by changes in market demand.