DEPRECIATION

Q1. Depreciation arises because of

(a) wear and tear.

(b) inflation .
(c) fall in the value of the asset.
(d) none of these

Q2. The loss on sale of an asset is debited to

(a) reserves.
(b) depreciation fund.
(c) Profit and Loss Account.
(d) None of these.

Q3. Diminishing Value Method means a method by which

(a) the rate of Depreciation falls year by year.

(b) the amount on which Depreciation is calculated falls year by year.
(c) the rate as well as the amount to which it is applied fall year by year.
(d) None of the above.

Q4. Straight Line Method of Depreciation is that method under which

(a) Depreciation is charged at a fixed percentage on the book value of the asset.
(b) Depreciation is charged at a fixed percentage on the original cost of the asset.
(c) Depreciation is charged on original cost of asset but the depreciation rate changes.
(d) None of the above.

Q5. The amount of Depreciation charged on machinery is debited to

(a) Depreciation Account.

(b) Machinery Account.
(c) Provision for Depreciation Account.
(d) None of these.
Q6. Which of the following factors affect the amount of depreciation?

(a) Cost of the Asset.

(b) Expected Useful Life of the Asset
(c) Expected residual life of the asset.
(d) All of these.

Q7. Depreciation on fixed assets is

(a) cash transaction.

(b) Internal transaction.
(c) External transaction.
(d) No transaction at all.

Q8. Which one is not the cause of Depreciation?

(a) Eflux of time.

(b) Price fluctuation.
(c) Obsolescence.
(d) Natural wear and tear.

Q9. Charging depreciation is

(a) compulsory.
(b) voluntary
(c) dependent on the condition of assets.
(d) None of these.

Q10. A machine is purchased on lst April, 2020 for ₹80,000 . The expenses
incurred on its installation is 20,000. The residual value at the end of its
expected useful life of 4 vears is estimated at ₹10,000. The amount of
depreciation under Straight Line Method, the year ended on 31st March, 2021
will be

(a) ₹22,500
(b) ₹20,000
(c) ₹17,000
(d) ₹13,125
Q11. Depreciation is a

(a) Reserve.
(b) Provision.
(c) Both (a) and (b).
(d) None of these.

Q12. Depreciation is

(a) Revenue Expenditure.

(b) Capital Expenditure.
(c) Deferred Revenue Expenditure
(d) None of these.

Q13. Depreciation is a process of

(a) valuation of asset.

(b) allocation of cost of asset over its expected useful life.
(c) both of valuation of asset and allocation of cost.
(d) None of the above.

Q14. A machinery which costs 2,00,000 is depreciated at 25% per year using
the Written Down Value Method. At the end of three years, it will have a net
book value of

(a) 1,50,000.
(b) 84,375.
(c) 1,12,500.
(d) 1,00,000.

Q15. Depreciation is charged on

(a) Current Assets.

(b) Fixed Assets.
(c) Total Assets.
(d) Fictitious Assets.
Q16. The term amortisation is used to write off

(a) Fixed Assets.

(b) Intangible Assets.
(c) Tangible Assets.
(d) Wasting Assets.

Q17. Amount of depreciation charged under diminishing balance method remains

(a) Increasing.
(b) Decreasing.
(c) Fixed.
(d) Fluctuating.

Q18. Under diminishing balance method, depreciation is charged on

(a) Original Cost.

(b) Written Down Value.
(c) Cost of Production.
(d) Net Profits.

Q19. Which of the following is not a cause of depreciation

(a) Wear and Tear.

(b) Passage of Time.
(c) Fall in the market value.
(d) Accident.

Q20. An asset was purchased for ₹ 5,00, 000 and as per reducing balance method, 20%
deprecation is charged each year. What is the value of assets at the end of three years?

(a) 3,50,000.
(b) 2,56,000.
(c) 4,00,000
(d) 3,20,000

ANSWERS :-
1.A 2.C 3.B 4.B 5.A
6.D 7.B 8.B 9.A 10.A
11.B 12.A 13.B 14.B 15.B
16.B 17.B 18.B 19.C 20.B
Q1. Define Depreciation.

Depreciation is a fall in value of an asset because of its usage or with eflux of time or due to
obsolescence or accident.

Q2. What is meant by Accumulated Depreciation?

It is the total depreciation already charged as expense in different accounting period and
credited to Provision for Depreciation Account.

Q3. What is Depreciable Cost?

Depreciable Coost = Cost of Asset - Scrap/Residual Value.

Q4. Give two methods of providing Depreciation.

Methods of computing depreciation are:

(i)Straight Line Method, and
(ii) Written Down Value Method.

Q5. Under which method of depreciation asset is depreciated more in the initial years as
compared to the later years of its life?

Written Down Value Method.

Q6. Give any two causes of Depreciation.

Causes of depreciation are:

(i) use of asset, and
(ii) obsolescence.

Q7. What is the impact of GST Paid at the time of purchase of machinery on
depreciation ?

GST Paid does not have any impact on depreciation since GST Paid is not a cost of
asset, it is set-off against GST Collected.
Q8. What is the impact of GST Collected at the time of sale of asset on prrofit or loss?

GST Collected does not have any impact on profit or loss, it being a liability of the firn
to deposit in Government Account.

Q9. What is the residual or scrap value of the asset ?

It is the estimated value of the fixed asset at the end of its estimated useful life . It is the
amount which is expected to be received when the asset is sold at the end of its useful life.

Q10. What are the objectives of providing Depreciation? (Any two)

(i) To ascertain correet profit or loss,

(ii) To show the assets at their proper value.
Q1. What is meant by Straight Line Method of providing Depreciation?

Straight Line Method of providing depreciation means depreciation is caleulated at a

percentage of original cost. Depreciation remains uniform from year to year.

Q2. What is meant by Written Down Value Method of providing Depreciation?

Written Down Value Method of providing depreciation means depreciation is calculated

and charged at a fixed rate on written down value of the asset every year.

Q3. What are the merits of Straight Line Method? (Any two)

Merits of Straight Line Method are:

(i) It is a simple method of providing depreciation.
(ii) Assets can be depreciated up to the estimated residual value.

Q4. What are the demerits of Straight Line Method? (Any two)

Demerits of Straight Line Method are:

(i) interest element on capital is ignored.
(ii) Repair and Maintenance cost which is likely to be more in later years is not considered.

Q5. What are the merits of Written Down Value Method? (Any two)

Merits of Written Down Value Method are:

(i) It takes into consideration repairs and maintenance cost in the later years.
(ii) It is accepted by the Income Tax Act.

Q6. What are the merits of Written Down Value Method? (Any two)

Demerits of Written Down Value Method are:

(i) It is difficult to ascertain the correct rate of depreciation.
(ii) Under this method, value of asset cannot be zero.

Q7. What are the factors involved in providing Depreciation?

Factors involved in providing depreciation are:
(i) Cost of the asset.
(ii) Estimated residual value of the asset at the end of its useful life, and
(iii) Estimated effective life of the asset.

Q8. What is book value or written down value of a fixed asset?

It is the part of the cost of a fixed asset which has not yet been depreciated. The book
value of an asset is its cost when it is purchased. Thereafter, it is the cost less accumulated
depreciation.

Q9. What is meant by Asset Disposal Account?

Asset Disposal Account means that the cost of the asset and also the provision for
depreciatt is transferred to the account at the time of its sale (disposal). The sale
proceeds are credited to the account and gain (profit) or loss on sale on its
disposal is determined.

Q10. Ram purchased computer on lst April, 2010 for ₹6,00,000 . He charges depreciation
on Written Down Value Method. On 31st March, 2011, they sold the computer for
₹1,65,000 and incurred a loss of ₹75,000. What was the rate of Depreciation p.a. ?

Book value as on 31st March, 2011 = Sale Proceeds + Loss on Sale

=1,65,000 + 75,000
= 2,40,000

Cost as on lst April, 2010 = 6,00,000.

Amount of Annual Depreciation = Cost as on 1st April, 2010 - Book Value on 31st March, 2011
=6,00,000 -2,40,000
= 3,60,000

Rate of Depreciation = Annual Depreiation/Cost of assets x100

= 3,60,000/6,00,000x100
= 60%
Q11. What are abnormal factors ?

Decline in the usefulness of the asset may be caused by abnormal factors such as accidents due
to fire, earthquake, floods, etc. Accidental loss is permanent but not continuing or gradual. For
example, a car which has been repaired after an accident will not fetch the same price in the
market even if it has not been used.
Q12. Ram & Co. purchased machinery for Rs. 21,000 on 1st April, 2021. The
estimated life of the machinery is 10 years, after which its residual value will be Rs.
1,000 only. Find the amount of Annual Depreciation according to the Fixed
Installment Method. Ignore GST.

Amount on Annual Depreciation under Fixed Installment Method:- =(Amount to be

Depreciated)/(Number of year of life of Machine)

=(Cost Price - Scrap Value)/(Number of year of life of Machine)

=(21,000-1,000)/(10 Years)

=20,000/(10 Years)

= Rs. 2,000 p.a

Q1. What is Depreciation? What are the objectives of providing Depreciation?

Meaning of Depreciation: Depreciation is the fall in the value of tangible fixed asset because of its
usage or with efflux of time or due to obsolescence or accident.

Objectives for providing Depreciation:-

The following are the objectives for providing depreciation:

(i) To find out the correct profit or loss: the profit for any year can be determined only when all cost
of earning revenues have been accounted for. Decrease in the value of fixed assets or depreciation
shows the cost of earning revenue by use of fixed assets in the accounting year. Depreciation is not
optional but compulsory to determine correct profit or loss.

(ii) To show true and fair view of the financial position: Depreciation, if not charged, would result in
assets being stated at a higher value. As a result of this, the Position Statement or Balance Sheet
would not present a true and fair view of the financial position.

(iii) Provision for funds out of profits for replacement: Funds should be retained, out of Profits, for
replacement of assets at the end of life of the asset. The amount of depreciation is debited to Profit
and Loss Account, on account of depreciation are retained in the business as no payment is made like
other expenses.

(iv) To ascertain the correct cost of production: Depreciation should be taken into consideration for
calculating the cost of production.

Q2. What are the two methods for providing Depreciation? Give the merits and demerits of
each method

Two Methods of Depreciation:-

The amount of depreciation to be charged for the year is calculated by using various methods. But the
two main methods for calculating depreciation are:

1. Fixed Percentage on Original Cost or Fixed Installment or Straight Line Method.

2. Fixed Percentage on Diminishing Balance or Reducing Installment Method or Written Down Value
Method.

Advantages of the Straight Line Method are:-

1. It is a simple method of calculating the depreciation.

2. In this method, assets can be depreciated up to the estimated scrap value or zero value.

3. It is easy to calculate the amount of depreciation under this method.

4. The Profit and Loss Account is debited or charged with same amount of depreciation every year and
uniformity is maintained on the expenditure.
Disadvantages of the Straight Line Method are:

1. There is no arrangement of interest on capital invested in assets in this method.

2. With the passage of time, work efficiency of assets decreases and repair expenses increases. As a
result, in later years, there is more load on the Profit and Loss Account due to increased repair
expenses.

3. Sometimes in this method, the book value of assets becomes nil, still the assets are used in the
business.

Advantages of the Written Down Value Method:

The following are the advantages of the Written Down Value Method:

1. There is same weightage on Profit and Loss Account of depreciation and repair expenses.

2. This method is easier than Straight Line Method.

3. In case of expansion and increase in assets, the depreciation can be computed easily by this method.

4. This method is acceptable by the Government under the Income Tax Act.
Disadvantages of the Written Down Value Method:

The following are the disadvantages of the Written Down Value Method:

1. In this method the value of the asset can never be zero.

2. It is a difficult task to ascertain the proper rate of depreciation.

3. There is no provision of interest on capital invested in use of assets.

Q3. Explain the following briefly:

(i) Assets Disposal Account

(ii) Written Down Value Method of Providing Depreciation

(i) Asset Disposal Account: In case of asset being sold. a new account named 'Asset Disposal Account'
is opened in the ledger for the purpose of calculating profit or loss on the sale of an asset. Journal
entries for sale or disposal of asset will depend upon the method of recording depreciation.

(ii) Written Down Value/Diminishing Balance/Reducing Balance Method of Charging Depreciation:

Under this method, depreciation is charged at a fixed rate on the reducing balance or cost less
depreciation every year. A fixed rate on the written down value of the asset is charged as
depreciation every year the expected useful life of the asset. A fixed depreciation percentage is
applied to the book value and not to the cost of the asset.
For example the cost of the asset is 1,00,000 and the percentage of depreciation to be
written off each year is 10%. In the first year, the amount of depreciation will be 10.000;
this will reduce the book value to 90.000, Second year, the depreciation amount will be
9,000, that is of 90,000. Thus, every year the depreciation amount will go on reducing.

Q4. Distinguish between the Straight Line Method and Written Down Value
Method of Providing Depreciation.

Q5. Explain the reasons of depreciation in an asset

The reasons of depreciation in an assets are as explained below:

I. Depreciation in an asset can occur for a variety of reasons, including wear and tear
from use or the passage of time.

II. Assets become obsolete after a specific amount of time due to obsolescence.

III. Assets' legal rights may expire after a predetermined period.

IV. Depreciation may occur due to unusual circumstances such as an accident, fire, or
natural disaster..
Q6. State briefly the need for providing depreciation.

The need for depreciation can be aptly explained by the following pointers:

Determining the actual profit and loss:

Accurate profit and loss can only be determined when all revenues and expenses are
recorded in the P & L Account. Assets that are employed in production help the
business to earn their income and their cost, i.e. depreciation is charged as an expense
to the P & L Account.

Present unbiased financial statements:

If depreciation is not shown, the assets will appear on the balance sheet at a higher
value than what they are; hence it will impact the projection of accurate and fair
financial statements of the enterprise.

Production cost:
The depreciation charged on plant and machinery and other assets involved in the
production is also included in the cost of production. If it is excluded, then the cost of
production is undervalued, thus leading to lower sale prices and lesser revenues.

Distributing dividends:
The profits will be overstated if depreciation is not charged. Not accounting for
depreciation will lead to the projection of more profits to be distributed as dividends.
The distribution of dividends can then lead to the moving away of essential resources
from the capital of the business.

Tax considerations:
When businesses charge depreciation, the profit and loss account shows a lesser
reported profit than when the depreciation is not charged. Depreciation can help
companies to pay lesser taxes at the end of the accounting year.

Provide funds for asset replacement:

Depreciation isn't a costly expense. Hence when depreciation is charged, the business
retains that amount which it uses in future to replace the fixed assets after its
practical term.

Q7. What are the features of Depreciation?

1. It is decline in the book value of fixed assets.
2. It includes loss of value due to effluxion of time, usage or obsolescence. For example, a business
firm buys a machine for Rs. 1,00,000 on April 01, 2017. In the year 2017, a new version of the
machine arrives in the market. As a result, the machine bought by the business firm becomes
outdated. The resultant decline in the value of old machine is caused by obsolescence.
3. It isa continuing process.
4. It is an expired cost and hence must be deducted before calculating taxable profits.
5. It is a non-cash expense. It does not involve any cash outflow. It is the process of writing-off the
capital expenditure already incurred.

Q8. What is depletion?

The term depletion is used in the context of extraction of natural resources like mines,
quarries, etc. that reduces the availability of the quantity of the material or asset. For example,
if a business enterprise is into mining business and purchases a coal mine for Rs. 10,00,000.
Then the value of coal mine declines with the extraction of coal out of the mine. This decline
in the value of mine is termed as depletion. The main difference between depletion and
depreciation is that the former is concerned with the exhaution of economic resources, but
the latter relates to the usage of an asset. In spite of this, the result is erosion in the volume of
natural resources and expiry of the service potential. Therefore, depletion and depreciation
are given similar accounting treatment.

Q9. What do you know about amortization?

Amortisation refers to writing-off the cost of intangible assets like patents, copyright, trade
marks, franchises, goodwill which have utility for a specified period of time. The procedure
for amortisation or periodic write-off of a portion of the cost of intangible assets is the same
as that for the depreciation of fixed assets. For example, if a business firm buys a patent for
Rs. l0,00,000 and estimates that its useful life will be 10 years then the business firm must
write off Rs. 10,00,000 over 10years. The amount so written- off is technically referred to as
amortisation.

Q10. Write a short note on obsolescence ?

Obsolescence is another factor leading to depreciation of fixed assets. In ordinary

language, obsolescence means the fact of being "out-of-date". Obsolescence implies to an
existing asset becoming out-of-date on account of the availability
of better type of asset. It arises from such factors as:

• Technological changes;
• Improvements in production methods:
• Change in market demand for the product or service output of the asset
• Legal or other description.
Q1. Direction :- Read the following case study and answer question on the basis of the
same.

M/s XYZ purchased a plant for Rs 5,00,000 on 1st April, 2017, and spent Rs 50,000 for
its installation. The salvage value of the plant after its useful life of 10 years is estimated
to be Rs 10,000. The owner of the firm has certain dilemmas regarding the concept of
depreciation. You are required to advise him regarding the same by answering the
following questions.

Question. By using which of the following statements would you explain the concept of
depreciation to the owner?

(a) Depreciation is a measure of the wearing out, consumption or other loss of value of
depreciable asset arising from use, effluxion of time or obsolescence through technology
and market-change

(b) Depreciation is a measure of the wearing out, consumption or other loss of value of
depreciable asset arising from use or obsolescence

(c) Depreciation is reduction in the value of assets

(d) None of the above

Answer. A

Question. Which of the following factors that affect the amount of depreciation
would you point out to the owner to keep in mind?

(a) Historical cost of asset

(b) Estimated net residual value

(c) Depreciable cost

(d) All of the above

Answer. D

Question. Using which of the following statement would you explain the importance of
straight line method of depreciation to owner?
(a) It results into almost equal burden of depreciation and repair expenses taken together
every year on profit and loss account

(b) Income Tax Act accept this method for tax purposes

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

(d) This method makes it possible to distribute full depreciable cost over useful life of the asset

Answer. D

Question. Using which of the following statement would you explain the importance of
written down value method of depreciation to owner?

(a) This method is suitable for fixed assets which last for long and which require increased repair
and maintenance expenses with passage of time

(b) Income Tax Act accepts this method for tax purposes

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

(d) All of the above

Answer. D

Question. What will be the amount of depreciation charged annually using straight line
method?

(a) Rs50,000

(b) Rs54,000

(c) Rs55,000

(d) None of these

Answer. B
Q2. Direction :- Read the following case study and answer questions on the basis of the
same.

On 1st April, 2017, X Ltd. purchased a machinery for Rs 12,00,000. On 1st October,
2019 a part of the machinery purchased on 1st April, 2017 for Rs 80,000 was sold for
Rs 45,000 and a new machinery at the cost of Rs 1,58,000 was purchased and installed
on the same date. The company has adopted the method of providing 10% p.a.
depreciation on the diminishing balance of the machinery. X Ltd. maintains provision for
depreciation and machinery disposal account. You are required to answer the following
questions.

Question. Which of the following points need to be kept in mind when provision for
depreciation account is maintained?

(a) Asset account continues to appear at its original cost year after year over its entire life

(b) Depreciation is accumulated on a separate account instead of being adjusted in the

asset account at the end of each accounting period

(c) Both (a) and (b)

(d) None of the above

Answer. C

Question. What is the balance carried in the machinery account in March, 2018?

(a) Rs12,00,000

(b) Rs10,80,000

(c) Rs9,60,000

(d) None of these

Answer. A

Question. What is the accumulated depreciation on the machinery worth Rs 80,000

that was sold?
(a) Rs8,000

(b) Rs7,200

(c) Rs18,440

(d) None of these

Answer. C

Question. What is the gain or loss on the sale of machinery worth Rs 80,000?

(a) Rs16,560 profit

(b) Rs16,560 loss

(c) Rs35,000 loss

(d) Rs35,000 profit

Answer. B

Question. Provision for depreciation will be shown as a current asset by X Ltd. in

the balance sheet.

(a) True

(b) False

(c) Partially true

(d) Can't say

Answer. B