Depreciation Provisions and Reserves Test

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Depreciation Provisions and Reserves Test - 4

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Question 1
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Depreciation is a process of

A
Valuation of charge

B
Allocation of cost

C
Valuation of Profit

D
Valuation of assets

Solution

In order to fullfill the matching concept, we allocate depreciation amount over the useful life of assets. Because we receive benefits over the useful life of asset. so charging of whole depreciation in one year will be wrong.
Question 2
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Following are the causes of Depreciation except

A
Wear and tear due to use or passage of time

B
Obsolescence

C
normal factors

D
Expiration of legal rights

Solution

It does not make clear which are the factors which cause reduction in the value of assets. Generally wear and tear, obsolescence, emergence of new technology , expiration of legal rights etc are the causes of depreciation.
Question 3
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When an asset is disposed off the procedure will be recorded in a separate account called :

A
Asset disposal account

B
Profit account

C
Reserves account

D
Sales account

Solution

When an asset is sold then the proceedings will be recorded in a separate account called asset disposal account. It enables to calculate the profit earned or loss incurred in the sale transactions.
Question 4
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Under straight line method depreciation is calculated on _____value of asset

A
Market

B
Original

C
Written down

D
Cost less scrap

Solution

Under Straight line method, depreciation is calculated by dividing the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.
Question 5
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Every fixed asset loses its value due to wear and tear. This decline in the value of asset is known as

A
Devaluation

B
Depreciation

C
Amortization

D
Provisions

Solution

Depreciation is reduction in the value of an asset over time due to its use or aging
Question 6
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Which of the following is the limitation of the Written down value ?

A
Income Tax Act accept this method for tax purposes;

B
This method is suitable for fixed assets, which lasts for long

C
As a large portion of cost is written-off in earlier years, loss due to obsolescence gets reduced;

D
The value of the asset can never be zero

Solution

Because depreciation is calculated on written down value. Every time depreciation amount shall be reduced but will never be exact zero.
Question 7
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An increase in the value of fixed asset is referred to as:

A
Market capitalization

B
Purchase of Asset

C
Reserve depreciation

D
Appreciation

Solution

Appreciation is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates. This is the opposite of depreciation, which is a decrease over time.
Question 8
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Which journal entry to be passed For transferring the provision for depreciation already charged on the asset sold from the provision for depreciation account to the asset disposal account ?

A

B

C

D

Solution

By this entry, provision for depreciation already charged on the asset sold shall be transferred to related asset disposal account.
Question 9
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What is depreciation?

A
Portion of a fixed assets cost consumed during the current accounting

B
The value of asset

C
Cost of fixed asset’s repair

D
Cost of using a fixed asset

Solution

It is reduction in the value of an asset due to wear and tear.
Question 10
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The term depletion is used for :

A
Natural resources

B
Intangible assets

C
Liabilities

D
Fixed asset

Solution

Depreciation is a means of allocating the cost of a material asset over its useful life, and depletion is used to allocate the cost of extracting natural resources
Question 11
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Cost of a fixed asset – Accumulated depreciation expenses of the fixed asset=?

A
Historical cost of a fixed asset

B
Recoverable amount of a fixed asset

C
Market value of fixed asset

D
Book value of fixed asset

Solution

Book value of an asset is a value at which asset is recorded in books. It is also known as written down value.
Question 12
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What is the rate of charging depreciation under diminishing method?

A
Not fixed

B
10% p.a.

C
12% p.a.

D
15% p.a.

Solution

because every time depreciation is calculated on written down value of an asset.
Question 13
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The term _____ is generally used for the depreciation of natural resources

A
Amortization

B
Appreciation

C
Disposal value

D
Depletion

Solution

Depletion is an accounting techniqe used for allocation of value of natural resources.
Question 14
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Which journal entry to be passed for transferring the cost price of the asset sold to the asset disposal account ?

A

B

C

D

Solution

By this entry, Asset account will be reduced by the amount transferred to asset disposal account. Further all entries related to disposal shall be entered into Asset disposal account to calculate net profit or loss from such disposal.
Question 15
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Obsolescence means decrease in assets

A
Assets become out of fashion

B
Due to its use in business operations

C
Both

D
None

Solution

Obsolescence is a notable reduction in the utility of an inventory item or fixed asset. The determination of obsolescence typically results in a write-down of the inventory item or asset to reflect its reduced value
Question 16
1 / -0

Depreciation charged under diminishing method

A
Same every year

B
Decrease every year

C
Increase in one year and decrease another year

D
Increase every year

Solution

Under diminishing method, every time depreciation is calculated on written down value of an asset.
Question 17
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An alternative term used for accumulated depreciation expenses?

A
Depletion

B
Cumulative depreciation

C
Targeted depreciation

D
Provision for depreciation

Solution

It is used along with the fixed asset in order to report the net asset value.
Question 18
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In depreciation calculation, the useful life of a fixed asset is:

A
A certain figure

B
A predetermined figure for all fixed assets

C
An estimate

D
None of these

Solution

The value is depreciated in equal amounts over the course of the estimated useful life.
Question 19
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Which of the following is not a type of reserve

A
Workmen compensation fund

B
Provision for bad debt

C
General reserve

D
Retained earnings

Solution

Provision for Bad Debts is an asset account with a credit balance. It is used along with the Accounts Receivable(Debtors) in order to report the net realizable value of the accounts receivable.
Question 20
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Following are the provisions except Examples of provisions are :

A
Provision for liability

B
Provision for bad and doubtful debts;

C
Provision for taxation

D
Provision for depreciation;

Solution

If we use provision with liablity account, it will become a debit account. It means there is a reduction in liabilty and under the Prudence Concept, we do not underestimate liability or do not overstate income. Hence prudence concept do not allow provision for liability.