Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Depreciation is a non-cash expense that reduces the value of an asset over time. Assets depreciate for below mentioned reasons:

  • Wear and tear: For example, an auto will decrease in value because of the mileage, wear on tires, and other factors related to the use of the vehicle.
  • Obsolescence: Assets also decrease in value as they are replaced by newer models. Last year’s car model is less valuable because there is a newer model in the marketplace.
  • Keeping idle for prolonged period: when a machine is not used for a long time then it becomes potentially useless
  • Depletion: Various assets like mines etc. gets depleted because with the extraction mine is getting exhausted.

→ Characteristics of Depreciation
Depreciation has the following characteristics:

  • Depreciation is charged in case of fixed assets only, e.g., Building, Plant and Machinery, Furniture etc. There is no question of depreciation in case of current assets-such as Stock, Debtors, Bills Receivable etc.
  • Depreciation causes perpetual, gradual and continuous fall in the value of asset
  • Depreciation occurs till the last day of the estimated working life of asset
  • Depreciation occurs on account of use of asset In determined cases, however, depreciation may occur even if the assets are not used, e.g., Leasehold Property, Patent right, Copyright etc.
  • Depreciation is a payment against profits of an accounting period.
  • Depreciation does not depend on fluctuations in shop value of asset
  • Depreciation is caused due to functional and physical factors
  • Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).

Objectives of providing Depreciation:
→ To ascertain correct cost of production: The object of providing depreciation is to find out the correct cost of production. The asset loses its value due to its use in the business. Decrease in value is likely any other expense which must be debited to Profit and Loss account before profits are arrived at. It is like a factory expense which must be added to the cost of production. If it is not provided, the cost of production will not be correct.

→ To present true and fair view: If the depreciation is not provided, the assets will be shown at the higher value in the Balance Sheet than their real value. They will thus be overvalued. This will not show a true and fair view of the state of affairs of the business concern.

→To keep the Capital intact: The purpose of providing depreciation is to set aside a certain sum of money every year to replace that asset later on when it is discarded and thus to keep the capital intact.

→ Depreciation is a kind of expenditure, it should, therefore, be debited to the Profit & Loss Account to determine correct amount of profit or loss.

→ To Comply legal provisions: Legally it is also necessary to make provision for depreciation

→ Replacement of asset: When depreciation is provided it reduces the profit. The amount so saved, if set aside every year, is able to produce at the end of the life of the asset the amount required to replace it.

→ Saving in Taxes: Though depreciation is not a cash cost, it is permitted to be deducted from profits for tax purposes.

→ Evaluation of an asset: At the end of each year all the fixed assets should be properly valued. Their value decreases every year due to constant use. Hence to ascertain the correct value of asset providing of depreciation is necessary.

→ Factors which affect measurement of depreciation
Factors are:

  • Original cost of asset
  • estimated amount of expenditure on repairs during the beneficial life
  • estimated beneficial life of asset
  • estimated residual or scrap value
  • obsolescence
  • skill of operator who operated on the asset
  • legal provision related to depreciation

Journal entries for Depreciation:
(1) When depreciation is directly charged to asset account
Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes 1

(2) When Provision for Depreciation Account is opened
Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes 2

→ In this method asset account is not affected by depreciation. Depreciation charged every year is accumulated in Provision for Depreciation Account. In Balance sheet asset account is shown assets original cost less the accumulated provision for depreciation account. Alternatively the asset account can be shown at its original cost on the assets side and provision for depreciation can be shown on the liabilities side.

→ Various methods of providing depreciation
Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets. There are several methods for providing depreciation. These are
I. Uniform Charge Methods
II. Declining Charge Methods
III. Other Methods

I. Uniform Charge Methods – Depreciation is charged uniformly every year
A. Fixed Installment Method
B. Annuity Method
C. Insurance Policy Method
D. Depreciation fund Method

(A) Fixed Installment Method
In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting years to obtain depreciation expense per accounting year.

Formula: The formula to calculate the straight-line depreciation of an asset for a full accounting period is: Depreciation = (Cost – Residual value)/Useful life

Journal Entries
Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes 3

→ Merits

  • Straight line method or fixed installment method is very easy to employ because of its simplicity.
  • The asset can be written off to zero value under this method.
  • This method is useful for providing depreciation on lease hold property, patent right, trade mark, copyright etc.

→ Demerits
There are two major objections to the straight line method. These are:

  • This method assumes the same economic usefulness of the asset each year.
  • The repair and maintenance expenses are essentially same each period.

(B) Annuity Method
Under annuity method of depreciation the cost of asset is regarded as investment and interest at fixed rate is calculated thereon. Had the proprietor invested outside the business, an amount equal to the cost of asset, he would have earned some interest. So as a result of buying the asset the proprietor loses not only cost of asset by using it, but also the above mentioned interest. Hence depreciation is calculated in such a way as will cover both the above mentioned losses. The amount of annual depreciation is determined from annuity table.

Annuity method is particularly applicable to those assets whose cost is heavy and life is long and fixed, e.g. Leasehold property, land and building etc.

Journal Entries:
Under annuity method, journal entries have to be made in respect of interest and depreciation. As regards interest, it has to be calculated on the debit balance of the asset account at the commencement of the period, at the given rate. The entry that is passed:

1. Asset account
        To Interest account
(Being interest on capital sunk in asset)

With regard to depreciation the amount found out from the depreciation annuity table, the following entry is passed:

2. Depreciation account
        To Asset account
(Being the depreciation of asset)

It should be remembered that the interest is charged on the diminishing balance of the asset account, the amount of interest goes on declining year after year. But the amount of depreciation remains the same during the life time of the asset.

→ Merits

  • Useful method to use in respect to long-term lease which generally involve considerable capital outlay
  • Interest on capital investment is taken into account. This method is perceived to the most exact, precise and scientific form from the point of view of calculations.

→ Demerits

  • Though interest is taken into consideration that the rate is still arbitrary and not based on law
  • Computation using this method becomes more complicated where there are frequent additions, dismantling, etc taking place. Not so suitable for assets like Plant & Machinery.

C. Insurance policy Method
Under this method the amount represented by the depreciation fund, instead of being used to buy securities, is paid to an insurance company as premium. The insurance company issues a policy promising to pay a lump sum at the end of the working life of the asset for its replacement.

Journal Entries:
Every years two entries will be made:
1. In the beginning:
Depreciation insurance policy account
To Cash account
(Being the payment of premium on depreciation policy)

2. At the end of the year:
Profit and loss account
To Depreciation fund account
(Being the amount of depreciation charged to profit and loss account)
When the policy will mature i. e., to say the amount of the policy will be received. The entry is:

3. Cash account
To Depreciation insurance policy account (Being the policy amount realized)
The depreciation insurance policy account will show some profit. This will be transferred to depreciation fund account, the entry being.

4. Depreciation insurance policy account
To Depreciation fund account (Being the policy amount realized)
The asset account will have been shown throughout at its original cost. It now be written off by transfer to

→ Merit: The advantage of insurance policy method is that risk of loss on the sale of investment and the trouble and expense of buying investment are avoided.

→ Demerit – The disadvantage lies that the interest received on the premiums paid is comparatively very low.

D. Depreciation Fund Method
Under depreciation fund method or sinking fund method, a fund is created with the amount of annual depreciation. An amount equal to annual depreciation is invested each year in government papers or in some other gilt-edged 1 securities outside the business. The income earned from investment is deposited into the fund and immediately reinvested. This process is carried out throughout the life of the asset and at the end of its life a sum equal to the cost of i the asset is accumulated in the fund. Then the whole investment is sold and a new asset is acquired with the sale  proceeds.

The special feature of this method is that the sum required to buy the new asset is available from depreciation or sinking fund. As. a result, the working capital of business is preserved. Sinking fund method is specially applicable to ‘ costly machines in large scale industries.

Journal Entries

First Year
(1) When the asset is purchased:
Asset Account Dr.* * *
To Bank Account * * *

(2) For Providing depreciation at the end of first year:
Depreciation Account Dr.* * *
To Sinking Fund Account * * *

(3) For investing the amount:
Sinking Fund Investment Account Dr.* * *
To Bank Account * * *

Subsequent Years
(1) For Receipt of Interest on Investment:
Bank Account Dr.* * *
To Sinking Fund Account * * *

(2) For Transferring Interest to Sinking Fund:
Interest on Sinking Fund Account Dr.* * *
To Sinking Fund Account * * *

(3) For Providing Depreciation:
Depreciation Account Dr.* * *
To Sinking Fund Account * * *

(4) For Investing the Amount:
Sinking Fund Investment Account Dr.* * *
To Bank Account * * *

Last Years
(1) For Receipt of Interest on Investment:
Bank Account Dr.* * *
To Sinking Fund Account * * *

(2) For Transferring Interest to Sinking Fund Account:
Interest on Sinking Fund Account Dr.* * *
To Sinking Fund Account * * *

(3) For Providing Depreciation:
Depreciation Account Dr.* * *
To Sinking Fund Investment Account * * *

(4) For Sale of Investment:
Bank Account Dr.* * *
To Sinking Fund Investment Account * * *

(5) For Transferring Profit and Sale of Investment:
Sinking Fund Investment Account Dr.* * *
To Sinking Fund Account * * *

(6) For Transferring Loss on Sale of Investment:
Sinking Fund Account Dr.
To Sinking Fund Investment Account

(7) For Closing the Asset Account by Transferring Balance of Sinking Fund Account to Asset Account:
Sinking Fund Account Dr.
To Asset Account

→ Merit: A separate sum is provided for replacing the asset

→ Demerit: Depreciation fund method assumes a constant rate of return on investments in identical securities. This is hardly true, because rates of interest do vary every now and then. Moreover the burden on profit and loss account goes on increasing as years pass by since the amount of depreciation every year remains same but the amount spent on repairs goes on increasing as the asset becomes old.

II. Declining Charge Methods
(a) Diminishing Balance Method
(b) Sum of years Digits Methods
(c) Double Declining Method

(a) Diminishing Balance Method – Diminishing balance method is also known as written down value method or reducing installment method. Under this method the asset is depreciated at fixed percentage calculated on the debit balance of the asset which is diminished year after year on account of depreciation.

→ Rate of depreciation
r = 1 – (S/C)1/n where:
r = Rate of depreciation
n = Estimated useful life of asset
S = Residual value after the expiry of useful life
C = Original cost of asset

Journal Entries:
→ The entries in this case will be identical to those discussed in the case of the fixed installment method. Only the amount will be differently calculated.

→ Merits

  • This method is accepted by Income Tax Authorities.
  • Impact of obsolescence will be reduced at minimum level.
  • Fresh calculation is not required when additions are made.
  • Under this method the depreciation amount is gradually decreasing and it will affect the smoothing out of periodic profit.

→ Demerits

  • Residual Value of the asset cannot be correctly estimated.
  • It ignores interest on investment on opportunity cost which will lead to difficulty while determining the rate of depreciation.
  • It is difficult to ascertain the true profit because revenue contribution of the asset are not constant.
  • The original cost of the asset cannot be brought down to zero.

(b) Sum of years Digits Method – Sum of the years’ digits method of depreciation is one of the accelerated depreciation techniques which are based on the assumption that assets are generally more productive when they are new and their productivity decreases as they become old. The formula to calculate depreciation under SYD method is
S = n (n + 1)/2 where:
S = Sum of years
n = number of years of useful life of assets.
Applying it when n = 8 years.
S = 8 (8 + 1)/2 = 72/2 or 36

(c) Double Declining Balance Method – Double declining balance method is another type of accelerated depreciation method. It is a depreciation method in which the depreciation rate is applied double to that in straight line method. The depreciation in this method is charged on the complete purchase price of asset rather than the net of salvage value price in straight line method. In other words we can say that double declining depreciation method uses double the rate of straight line method.

III. Other Methods
(a) Depletion Method – Depletion method of depreciation is especially suited to mines, quarries, sand pits, etc.
According to it the cost of the asset is divided by the total workable deposits. In this way, rate of depreciation per unit of output is ascertained. Depreciation in any particular year is charged on the basis of the output during that year.
Rate of depreciation = total cost of mine/total units
Depreciation = rate of depreciation x quantity extracted during the year

(b) Group Depreciation Method – In this method assets having similar age life are grouped together for charging depreciation. Depreciation is not charged for individual asset.

(c) Machine Hour Rate Method -The machine hour method of depreciation estimates the useful life of an asset in machine hours, so, it is commonly applied on a machine. The useful life is based on the numbers of hours of a machine that can be utilized

Formula:
Rate of Depreciation = Original cost of asset – Scrap value/Life of the asset in Hours Depreciation = actual Number of hours × Rate of depreciation

(d) Inventory System of Depreciation: The inventory method (often called the appraisal system) is used to value small tangible assets such as hand tools or utensils. A tool inventory, for example, might be taken at the beginning and the end of the year. Then, the amount of depreciation expense could be calculated by using the value of the beginning inventory plus the cost of tools acquired for the year less the value of the ending inventory.

→ Change of method of Depreciation: The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.

When such a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method is adjusted in the accounts in the year in which the method of depreciation is changed . In respect of past years, the deficiency is charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus is credited to the statement of profit and loss.

Depreciation Accounting MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Which of the following is NOT a feature of depreciation?
a. Permanent
b. Continuous
c. Gradual
d. Temporary
Answer:
d. Temporary

Question 2.
In the trial balance the balance on the Provision for Depreciation Account is:
a. Shown as a credit item
b. Shown as a debit item
c. Sometimes shown as a credit, sometimes as a debit
d. Not shown, as it is part of depreciation
Answer:
a. Shown as a credit item

Question 3.
A boiler was purchased by a company for Rs 20 lakh after 2 years its cost came down to Rs10 lakh at present its cost is Rs15 lakh. How will we calculated the depreciation for this asset?
a. It will be calculated on the basis of its original cost 20 lakh rupees.
b. It will be calculated on the basis of 15 lakh rupees worth cost
c. It will be calculated on the basis of Rs. 10 lakh cost.
d. It will be calculated by taking the average of all three costs.
Answer:
a. It will be calculated on the basis of its original cost 20 lakh rupees.

Question 4.
Pick the odd one out.
a. Depreciation happens
b. By atmosphere
c. By company policies
d. Both a & b
Answer:
d. Both a & b

Question 5.
As per law enterprise is required to make provisions for depreciation
a. Joint stock company
b. Sole proprietor
c. Partnership
d. All of the above
Answer:
a. Joint stock company

Question 6.
For an asset NOT to be depreciable it
a. Must have limited useful size
b. Be of some technical importance
c. Must be used for production
d. None of the above
Answer:
b. Be of some technical importance

Question 7.
Depreciation amount is to be debited against
a. Revenues earned through it
b. Revenues earned
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 8.
Sum of years digits method is ______________ type of depreciation providing method.
a. Uniform change method
b. Declining change method
c. Depletion method
d. Group depreciation method
Answer:
b. Declining change method

Question 9.
Process of becoming out of date or obsolete is termed as:
a. Physical deterioration
b. Depletion
c. Obsolescence
d. Amortization
Answer:
c. Obsolescence

Question 10.
Some of the benefits you receive with depreciation are
a. Income tax saving
b. Customs tax saving
c. Sales tax saving
d. Excise duty saving
Answer:
a. Income tax saving

Question 11.
Providing depreciation is compulsory as it reflects
a. true financial position
b. makes provision so that in future the replacement asset could be purchased
c. both a & b
d. none of the above
Answer:
c. both a & b

Question 12.
An additional purchase of Rs. 2000 was made for a machine. Under straight line method of depreciation
a. Depreciation will be done for half of the year
b. Depreciation will be done from the beginning of the year.
c. Both a & b
d. None of the above
Answer:
a. Depreciation will be done for half of the year

Question 13.
An additional purchase was made for machine on 15.06.2009, under straight line method.
a. Depreciation will be changed from the date of purchase
b. Depreciation will be charged from the beginning of the year
c. Both a & b
d. None of the above
Answer:
a. Depreciation will be changed from the date of purchase

Question 14.
This is not the disadvantage of straight the method of depreciation
a. Cost of repairs keep increasing over the passage of time
b. The effective utilization of the asset is not taken in account
c. Value of the asset can be completely written off
d. It is difficult to make any asset useful in a systematic pattern
Answer:
c. Value of the asset can be completely written off

Question 15.
When depreciation fund account closes it transfers its balance to
a. Sinking fund
b. New asset account
c. Old
d. None of the above
Answer:
c. Old

Question 16.
Which is not the salient feature of sinking fund method?
a. Interest is an integral part
b. Amount released is affected by fractionations in interest rate
c. Investment in securities
d. Premium is paid in advance at the beginning of year
Answer:
d. Premium is paid in advance at the beginning of year

Question 17.
It is common in sinking fund method
a. The amount received at the end of the life of an asset is fixed
b. The amount received at the end of the life of an asset is not fixed
c. The amount received at the beginning of the life of an asset is fixed.
d. None of the above
Answer:
b. The amount received at the end of the life of an asset is not fixed

Question 18.
If an accumulated provision for depreciation account is in use then the entries for the year’s depreciation would be:
a. Debit Asset Account, credit Profit and Loss Account
b. Credit Profit and Loss Account, debit Provision for Depreciation Account
c. Credit Asset Account, debit Provision for Depreciation Account
d. Credit Provision for Depreciation Account, debit Profit and Loss Account
Answer:
d. Credit Provision for Depreciation Account, debit Profit and Loss Account

Question 19.
In annuity method interest is calculated
a. On the value of the asset at the time of purchase
b. On the value of the asset at the beginning of each year.
c. On the value of asset as expected at the end value of asset
d. Both a & b
Answer:
b. On the value of the asset at the beginning of each year.

Question 20.
Interest is credited to profit and loss account in
a. Annuity method
b. Sinking fund method
c. Insurance policy method
d. All of the above
Answer:
b. Sinking fund method

Question 21.
Select the depreciation method identified by income tax department
a. Diminishing balance method
b. Annuity
c. Sinking fund
d. None of the above
Answer:
a. Diminishing balance method

Question 22.
In diminishing balance method
a. Amount of depreciation value keeps on decreasing over the passage of time
b. Amount of depreciation value remains same over the passage of time
c. Calculation of rate of depreciation is early
d. Depreciation is charged on the original cost of asset
Answer:
a. Amount of depreciation value keeps on decreasing over the passage of time

Question 23.
For a machine that needs no maintenance or very little maintenance that also in the end year of asset the depreciation method that suits best is
a. Straight line method
b. Diminishing balance method
c. Annuity method
d. None of the above
Answer:
a. Straight line method

Question 24.
Invariably in diminishing balance method
a. Book value becomes zero
b. Book value never becomes zero
c. Book value is negative
d. Book value is infinite
Answer:
b. Book value never becomes zero

Question 25.
From a coal mine, 200 tons of coal was extracted dining the year and rate of depreciation is 10%. Depreciation charged as per depletion method will be
a. 2000
b. 20
c. 200
d. None of the above
Answer:
a. 2000

Question 26.
The depreciation method that is best suited for a machine that is being used on an hourly basis will be
a. Depletion method
b. Double declining method
c. Declining method
d. Service house method
Answer:
d. Service house method

Question 27.
In an enterprises some tools were purchased worth Rs. 2000 and later after 5 months additional tools worth 4000 were purchased it was presumed that the value of the total tools at the end of the year will be 2000 what will be the depreciation value?
a. 4000
b. Nil
c. 2000
d. 6000
Answer:
a. 4000

Question 28.
The standard given by ICAI for calculation of
a. Accounting standard – 5 depreciation accounting
b. Accounting standard – 6 depreciating accounting
c. Accounting standard – 7 depreciating accounting
d. Accounting standard – 4 depreciating accounting
Answer:
b. Accounting standard – 6 depreciating accounting

Question 29.
For changing the method of calculation of depreciation an enterprise should not
a. Calculate the value of asset by old method on the date of change
b. Calculate the depreciation of the past period of asset by new method
c. Calculate the depreciation of past
d. Find out the cost value of asset
Answer:
a. Calculate the value of asset by old method on the date of change

Question 30.
Which is the method that is not being recognized by the income tax department as a depreciation method to be used by an enterprise?
a. Fixed installment method
b. Straight line method
c. Written down value method
d. Depreciation and replacement of assets
Answer:
d. Depreciation and replacement of assets

Question 31.
To meet the additional fund that will be required for purchasing when a new asset is purchased in replacement to an old one some amount
a. May be transferred to profit and loss appropriation account
b. Must be transferred to profit and loss appropriation account
c. May to be transferred to depreciation account
d. Must to be transferred to depreciation account
Answer:
a. May be transferred to profit and loss appropriation account

Question 32.
Change in depreciation method requires
a. Change in consistency
b. An explanatory paragraph
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 33.
Change in the estimated life of our asset require
a. Consistency modification
b. Explanatory paragraph
c. Both a & b
d. Neither a nor b
Answer:
c. Both a & b

Question 34.
Eva has purchased a machine for Rs300, 000. She will depreciate it either at 20% on the straight-line basis or at 30% on the reducing- balance basis. Which method will lead to the highest combined profits in the first two years that the machine is owned?
a. The straight-line basis will lead to the highest combined profits.
b. The reducing-balance basis will lead to the highest combined profits.
c. The choice of depreciation method will not affect the combined profit figures.
d. Both the straight line basis at 20% per annum are the reducing balance basis at 30% per annum will lead to the same combined profit figure for the first two years.
Answer:
a. The straight-line basis will lead to the highest combined profits.

Question 35.
When Provision for Depreciation Account is maintained, the annual charge for depreciation shall be ____________ .
a. debited to Provision for Depreciation Account and credited to Profit and loss Account
b. debited to Asset Account and credited to Profit and loss Appropriation Account
c. debited to Asset Account and credited to Profit and Loss Appropriation Account
d. debited to Profit and loss Account and credited to provision for Depreciation Account
Answer:
d. debited to Profit and loss Account and credited to provision for Depreciation Account

Question 36.
For an asset owned for more than one year, the depreciation charge for the year calculated using the reducing-balance basis at the rate of 35% would be arrived at as follows:
a. 35% × cost of the asset.
b. 35% × (cost of the asset- accumulated depreciation)
c. 35% × accumulated depreciation.
d. 35% × (cost of the asset + accumulated depreciation)
Answer:
b. 35% × (cost of the asset- accumulated depreciation)

Question 37.
Depreciation arises because of:
a. Fall in the market value of an asst.
b. Physical wear and tear.
c. Fall in the value of asset
d. None of them.
Answer:
b. Physical wear and tear.

Question 38.
The straight line method of providing depreciation it:
a. Increase every year
b. Remain constant every year.
c. Decreases every year
d. None of them.
Answer:
b. Remain constant every year.

Question 39.
Under the diminishing balance method depreciation:
a. Increases every year.
b. Decreases every year.
c. Remain constant every year.
d. None of them.
Answer:
c. Remain constant every year.

Question 40.
Under the fixed installment method of providing depreciation it is calculated on
a. Original cost
b. On balance amount
c. On scrap value
d. None of them
Answer:
a. Original cost

Question 41.
Sinking fund is created in
a. Depreciation fund method
b. Defletion method
c. Fixed installment method
d. Annuity method
Answer:
a. Depreciation fund method

Question 42.
The amount of depreciation charged on a machinery will be debited to:
a. Machinery account
b. Depreciation account
c. Cash account
d. Repair account
Answer:
b. Depreciation account

Question 43.
Loss on sale of plant and machinery should be written off against:
a. Share premium
b. Depreciation fund account
c. Sale account
d. Profit & loss account
Answer:
b. Depreciation account

Question 44.
Loss on sale of machinery will be:
a. Debited on machinery A/c
b. Credited to machinery A/c
c. Credited to profit and loss A/c
d. None of them
Answer:
b. Credited to machinery A/c

Question 45.
Asset that has a limited useful life are termed as:
a. Limited assets
b. Depreciation assets
c. Unlimited asset ,
d. None of these
Answer:
b. Depreciation assets

Question 46.
Under the diminishing balance method, depreciation is calculated on:
a. Scrap value
b. On original value
c. On book value
d. None of them
Answer:
c. On book value

Question 47.
Which of the term is used to write off in reference to tangible fixed assets?
a. Depreciation
b. Depletion
c. Amortization
d. Both (b) and (c)
Answer:
a. Depreciation

Question 48.
The economic factors causing depreciation is/are
a. Time facto,
b. Obsolescence and inadequacy
c. Wear and tear
d. Money valuation
Answer:
b. Obsolescence and inadequacy

Question 49.
Total depreciation cannot exceed its:
a. Scrap value
b. Cost value
c. Market value
d. Depreciable value
Answer:
d. Depreciable value

Question 50.
Depreciation value of an asset is equal to:
a. Cost + Scrap value
b. Cost + Market price
c. Cost – Scrap value
d. None of these
Answer:
c. Cost – Scrap value

Question 51.
Depreciation does not depend on fluctuations as:
a. Market value of asset
b. Cost of price of asset
c. Scrap value of asset
d. None of these
Answer:
a. Market value of asset

Question 52.
Depreciation is:
a. An income
b. An asset
c. A loss
d. A liability
Answer:
c. A loss

Question 53.
The book value of an asset is obtained by deducting depreciation from its
a. Market value
b. Scrap value
c. Market + Cost price
d. Cost
Answer:
d. Cost

Question 54.
Depreciation fund method is also known as:
a. Sinking fund method
b. Annuity method
c. Sum of years digits method
d. None of these
Answer:
a. Sinking fund method

Question 55.
The method is specially suited to natural resources (mines, quarries, sand, pits etc.) is said to be:
a. Annuity method
b. Depletion method
c. Revaluation method
d. Sum of digits method
Answer:
b. Depletion method

Question 56.
Double – declining method is often used in the:
a. Singapore
b. South Africa
c. Japan
d. India
Answer:
d. India

Question 57.
In the provision method of depreciation the asset always appears at:
a. Cost price
b. Market Price
c. Scrap Value
d. None
Answer:
a. Cost price

Question 58.
Depreciable value of an asset is equal to:
a. Cost + scrap value
b. Cost + market price
c. Cost – scrap value
d. None of the given options
Answer:
c. Cost – scrap value

Question 59.
Which of the following depreciated?
a. Factory Buildings
b. Office Equipment
c. Plant & Machinery
d. Land
Answer:
d. Land

Question 60.
The allocation of the cost of a tangible plant asset to expense in the periods, in which services are received from the asset, is termed as:
a. Appreciation
b. Depreciation
c. Fluctuation
d. None of the given options
Answer:
b. Depreciation

Question 61.
The primary objective of providing depreciation is:
a. To calculate true profit
b. To show the asset on market value
c. To reduce tax Burden
d. To provide funds for replacement
Answer:
d. To provide funds for replacement

Question 62.
Under the diminishing balance method, depreciation amount is:
a. Payment
b. Receipt
c. Expenditure
d. None of these
Answer:
c. Expenditure

Question 63.
In considering a special order situation that will enable a company to make use of currently idle capacity, which of the following cost will be irrelevant:
a. Materials
b. Depreciation
c. Direct labour
d. Variable factory overhead
Answer:
a. Materials

Question 64.
Depreciation is based on:
a. Economic life of asset
b. Declared life of asset by supplier
c. Normal life of asset
d. None of these
Answer:
a. Economic life of asset

Question 65.
The Amount changed to deprecation goes on declining in:
a. Depreciation fixed method
b. Annuity method
c. Written-down value method
d. Straight line depreciation method
Answer:
c. Written-down value method

Question 66.
Which of the following is the main cause of depreciation?
a. Fall in the market value of money
b. Fall in the market value of an asset
c. Physical wear and tear
Answer:
b. Fall in the market value of an asset

Question 67.
Depreciation is _____________ of an asset
a. Valuation
b. Allocation
c. Sale value
d. All of the above
Answer:
b. Allocation

Question 68.
The estimated value of an asset after the expiry of its useful life is called as:
a. Written Down value
b. Residual Value (Right Answer)
c. Accumulated depreciation
d. Sales value
Answer:
c. Accumulated depreciation

Question 69.
On a worksheet, the adjusting entry to account for depreciation of equipment consists of
a. debit to Depreciation Expense and a credit to Equipment.
b. debit to Depreciation Expense and a credit to Accumulated Depreciation.
c. debit to Equipment and a credit to Accumulated Depreciation.
d. debit to Accumulated Depreciation and a credit to Equipment.
Answer:
b. debit to Depreciation Expense and a credit to Accumulated Depreciation.

Question 70.
In which depreciation method Depreciation remains constant?
a. Reducing balance method
b. Reducing balance method
c. Reducing balance method
d. Reducing balance method
Answer:
a. Reducing balance method

Question 71.
What impact does depreciation have on the cash account?
a. Depreciation only impacts the cash account if inflation has occurred.
b. Depreciation has no impact on the cash account.
c. Depreciation results in an increase to cash.
d. Depreciation results in a decrease to cash.
Answer:
b. Depreciation has no impact on the cash account.

Question 72.
At the balance sheet date the balance on the , Accumulated Provision for Depreciation Account
is:
a. Transferred to Depreciation Account
b. Transferred to the Asset Account
c. Transferred to Profit and Loss Account
d. Simply deducted from the asset in the Balance Sheet
Answer:
d. Simply deducted from the asset in the Balance Sheet

Question 73.
Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?
a. Increased operating costs
b. Overhaul of equipment
c. Salvage value of equipment when project is complete
d. Depreciation expense
Answer:
d. Depreciation expense

Question 74.
The value of an asset is Rs. 50,000. Its working life is 10 years. Firm uses sum of years digits method for providing depreciation. What wilt be the amount of depreciation for second year?
a. Rs. 5,000
b. Rs. “9,091
c. Rs. 4,500
d. Rs. 8,181
Answer:
Rs. 8,181

Hint:
S = n (n + 1)/2 where:
S = Sum of years
n = number of years of useful life of assets
S = 10(10 + 1)/2
= 110/2
= 55
Depreciation for second year = 9/55 x50000= Rs 8,181.

Question 75.
Decrease in value of a fixed asset due to normal wear and tear is known as¬
a. Depreciation
b. Obsolescence
c. Appropriation
d. Spoilage.
Answer:
Depreciation

Hint:
Depreciation is a non-cash expense that reduces the value of an asset over time.

Question 76.
Dinesh Garments purchased a machine for Rs.50,000 and spent Rs. 6,000 on its erection. On the date of purchase, it was estimated that effective life of the machine will be ten years and after ten years its scrap value will be Rs. 60,000. The amount of depreciation for second year on straight line basis is:-
a. Rs. 5,000
b. Rs. 6,000
c. Rs. 5,600
d. Rs. 6,200
Answer:
a. Rs. 5,000

Hint:
Depreciation as per straight line = \frac{\text { Cost - Residual value }}{\text { Useful life }}
Useful life
= 56000 – 6000/10 = 5000

Question 77.
A firm charges depreciation on straight line method. The rate of depreciation is reduced from 25% to 10%. What will be the impact of this change on profits?
a. Decrease in profits
b. Increase in profits
c. Decrease in assets
d. Increase in expenses.
Answer:
b. Increase in profits

Hint:
Depreciation is transferred to debit side of profit & loss A/c. If depreciation rate is reduced from 25% to 10%, depreciation charged will be less than previous years.
Thus the amount of depreciation transferred to profit and loss A/c will be less
The less amount of depreciation will be transferred to profit & loss A/c which will result in increase in profits.

Question 78.
Under straight line method, depreciation is calculated on:
a. Written Down Value
b. Salvage Value
c. Original Cost
d. Market Value
Answer:
c. Original Cost

Hint:
Depreciation is calculated on Original Cost in case of straight line method.
In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting years to obtain depreciation expense per accounting year.

Question 79.
Which of the following assets are shown at written down value in Balance Sheet?
a. Current Assets
b. Floating Assets
c. Floating Assets
d. Fixed Assets Questions of June 2013
Answer:
d. Fixed Assets Questions of June 2013

Hint:
Diminishing balance method is also known as written down value method or reducing installment method. Under this method the asset is depreciated at fixed percentage calculated on the debit balance of the asset which is diminished year after year on account of depreciation.

Question 80.
On 1st April, 2012 in Sethi’s Ledger, furniture account showed a balance of Rs. 2,00,000. On 1st October, 2012 Sethi purchased new furniture by paying Rs. 5,000 and giving old furniture whose book value on 1st April, 2012 was Rs. 12,000 to the seller. Sethi provides depreciation on furniture @ 10% per annum on diminishing balance method. The net value of furniture in Sethi’s books as on 31st March, 2013 would be:
a. Rs. 1,85,080
b. Rs. 1,83,960
c. Rs. 1,84,780
d. Rs. 2,04,400.
Answer:
c. Rs. 1,84,780

Hint:
Cost of new asset purchased
Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes 4

Depreciation
Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes 5
Balance as per furniture A/c – 2,00,000
Cost of new asset purchased – 5000
Less: depreciation – 19620
Less: depreciation – 600
(12000 × 10% × 6/12)
Net value of furniture – 184780

Question 81.
The written down value of machine on 31 st March, 2013 is Rs. 72,900. The machine was purchased on 1st April, 2010. Depreciation is being charged @ 10% p.a. by diminishing balance method. The cost price of the machine would be:
a. Rs. 1,00,000
b. Rs. 81 ,000
c. Rs. 90,000
d. Rs. 72,900.
Answer:
a. Rs. 1,00,000

Hint:
Cost price of machine = \frac{72,900}{(1-10)^{3}} = 72900/93
= Rs. 1,00,000

Question 82.
A company purchased plant for 50,000. The useful life of the plant is 10 years and the residual value is 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
a. 8%
b. 9%
c. 10%
d. None of the above
Answer:
b. 9%

Hint:
Depreciation = \frac{50,000-5,000}{10} = 4 500/-
Rate of depreciation = \frac{4,500_{000}}{50,000} × 100 = 9% p.a.

Question 83.
Madhur and Company purchases a machine for a certain sum. The company has a policy of charging 8% depreciation on written down value. The depreciated value of the machine after three years in the books of Madhur and Company is Rs. 3,89,344. What was the purchase value of machine.
a. Rs. 5,00,000
b. Rs. 4,60,000
c. Rs. 4,23,000
d. Rs. 5,52,000.
Answer:
a. Rs. 5,00,000

Hint:
W.D.V. at machine at the end of 3rd year = Rs. 3,89,344
W.D.V. of machine at the beginning of 3rd year will be = 389344/100 – 8% = 389344/92% = 423200
W.D.V. of machine at the beginning of 2nd year will be = 423200/92% = 4,60,000
W.D.V. of machine at the beginning of 1st year will be (or purchase value) = 4,60,00/92%
= 5,00,000

Question 84.
The value of a fixed asset after deducting depreciation is known as its-
a. Book value
b. Market Value
c. Face Value
d. Realisable value.
Answer:
a. Book value

Hint:
For assets, the book value is based on the original cost of the asset less any depreciation.

Question 85.
Dinesh Garments purchased a machine for Rs. 50,0oo and spent Rs. 6,000 on its creation. On the date of purchase it was estimated that the effective life of the machine will be ten years and after ten years its scrap value will be Rs. 6,000. The amount of depreciation for each year on straight line basis is –
a. Rs. 5,000
b. Rs. 5,600
c. Rs. 6,000
d. None of the above.
Answer:
a. Rs. 5,000

Hint:
Depreciation = (Cost – Residual value)/Useful life
Depreciation = 56000 – 6000/10 = 5000
Cost = 50,000 + 6000

Question 86.
An equipment was purchased on 1st January, 2012 for Rs. 25,000 and is to be depreciated at 30% based on reducing balance method. If the company closes its books of account on 31st March every year, what would be the net book value-of the equipment as at 31st December, 2013-
a. Rs. 12,250
b. Rs. 17,750
c. Rs. 10,000
d. Rs. 12,545.
Answer:
a. Rs. 12,250

Hint:
Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes 6

Question 87.
Coalmine is which type of asset
a. Fixed Asset
b. Current Asset
c. Wasting Asset
d. Fictitious Asset.
Answer:
c. Wasting Asset

Hint:
An asset that has a limited life and thus decreases in value (depreciates) over time is wasting asset. Also applies to consumed assets, such as oil or gas.

Question 88.
If the original and current price of machinery is given, it will be recorded at which value?
a. Historical value
b. Realisable value
c. Market value
d. Original cost.
Answer:
d. Original cost.

Hint:
Due to the cost concept, we record the fixed assets at cost price & not at market price.

Question 89.
An equipment was purchased on 1st January, 2012 for Rs. 25,000 & is to be depreciated at 30% based on WDV method. If the company closes its books of account on 31 st March every year. What would be the net book value of the equipment as at 3-1 st December 2013:
a. 12,250
b. 10,000
c. 17,750
d. 12,545
Answer:
a. 12,250

Hint:
Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes 7

Question 90.
Which of the following are amortised:
a. Patent
b. Copyright
c. Goodwill
d. All of these.
Answer:
d. All of these.

Hint:
Amortization means depreciation but it is used for write off of intangible assets such as goodwill, patents, copyright etc.

Question 91.
The WDV of machine is Rs. 72,900, rate of depreciation @ 10%, period 3 years. Calculate the original cost of machinery.
a. 72,900
b. 80,000
c. 1,20,000
d. 1,00,000.
Answer:
d. 1,00,000.

Hint:
cost of machinery = 72900/(1 – 10)3
= 1,00,000

Question 92.
Valueless assets are treated as:
a. Tangible Asset
b. Intangible Asset
c. Fictitious Asset
d. Current Asset.
Answer:
c. Fictitious Asset

Hint:
Assets, which have no market value, are called fictitious assets. Examples of fictitious assets are preliminary expenses etc.

Question 93.
A company purchased a mine of Rs. 50,000. Its scrap value is Rs. 5,000 and expected working life is 9 years. 1,00,000 units were expected to be produced during its working life . Units produced in first 3 years are 7,000, 15,000 and 19,000 respectively, Calculate the amount of depreciation for the third year by using depletion method .
a. Rs. 3,150
b. Rs. 8,550
c. Rs. 3,000
d. Rs. 6,750
Answer:
b. Rs. 8,550

Hint:
Rate of depreciation = total cost of mine/total units
= 50,000 – 5000/1,00,000 = 45 = 45%
Depreciation = rate of depreciation × quantity extracted during the year = 45 ×19000 = 8,550

Question 94.
The value of a fixed asset after deducting depreciation is known as its …………………….
a. Face Value
b. Market Value
c. Realisable Value
d. Book Value
Answer:
d. Book Value

Hint:
For assets, the book value is based on the original cost of the asset less any depreciation.

Question 95.
Samar purchased a machinery worth Rs. 1,00,000 and spent Rs. 20,000 on its repairs and Rs. 15,000 on its carriage. He decided to sell the machinery at 25% margin on selling price. What will be the expected sale value of machinery?
a. Rs. 1,25,000
b. ‘Rs. 1,53,090
c. Rs. 1,80,000
d. Rs. 1,33.000
Answer:
c. Rs. 1,80,000

Hint:
Cost of machinery = Rs. 1,00,000 + 20,000 + 15,000 = Rs. 1,35,000
25% on selling price = \frac{25}{100-25} on cost of machinery
= 25 × 135000/75 = 45,000
Rs. 1,35,000 + Rs. 45,000 = Rs. 1,80,000

Question 96.
A decrease in value of fixed asset due to age, wear and tear:
a. Appreciation
b. Written down value
c. Depreciation
d. Accumulated depreciation.
Answer:
c. Depreciation

Hint:
Depreciation is a non-cash expense that reduces the value of an asset over time. Assets depreciate for below mentioned reasons:

  • Wear and tear
  • Obsolescence
  • Keeping idle for prolonged
  • Depletion

CS Foundation Fundamentals of Accounting and Auditing Notes