CPT SANGITAS CLASSES ACCOUNT CHAPTER- 5

DEPRECIATION ACCOUNTING

1. Under straight line method, depreciation is calculated on :a) Written down value b) Scrap value c) Original cost d) None of the three

2. Depreciation arises because of :a) Fall in the market value of the assets b) Fall in the value of money c) Physical wear and tear of the assets d) None of the three

3. The value of an asset after deducting depreciation from the historical cost in know as :a) Fair value b) Book value c) Market value d) Net realizable value

4. Which of the following is/are method of depreciation?a) Annuity method b) Revaluation method c) Depreciation Fund method d) All of these

5. Depreciation includes :a) Depreciation indicates the decrease in the value of the assets. (b) Such decrease in value is permanent and perpetual c) Depreciation is charged on the fixed assets alone and not on circulating assets. (d) All of these

6. In the case of a particular depreciation method the periodic depreciation is smaller than the asset’s actual annual depreciation cost. The annual net incidence on profit and loss account remains constant due to incorporation of only fixed depreciation. The periodic depreciation method used in this case is :a) Sinking fund method b) Diminishing balance method c) Annuity method d) Sum-of-year digits method

7. If depreciation is calculated on the basis of the formula. n(n +1) , then which one following methods is adopted? 2

a) Diminishing value method b) Annuity method c) Sum of years digits method d) Sinking fund method

8. Consider the following statements : The purpose of charging depreciation to the profit and Loss Account are :

1. To provide for replacement of an asset 2. To ascertain true profit 3. To present real financial position 4. To arrive at the scrap value of the asset

Which of these statement are correct ?a) 1 and 4 b) 1 and 2 c) 1,2 and 3 d) 2,3 and 4

9. Charging a period for the proportionate cost of an intangible asset is termed as : a) Depreciation b) Diminution c) Amortisation d) Expiration

10. Obsolescence means decline in the value due to :

a) Fall in the market price b) Physical wear and tear c) Innovations and inventions d) Efflux of time

11. Which of the following is depreciation method ?a) Annuity method b) Sinking fund method c) Group depreciation d) All of these

12. Which of the following is/are factors of depreciation ?a) Assets cost b) Salvage value c) Useful life d) All of these

13. Depreciation is related with :a) Fixed Assets b) Current Assets c) Capital d) Money

14. Amortization is related with :a) Tangible assets b) Intangible assets c) Capital d) Money

15. Which of the following statement is correct about depreciation ?a) The process of wear and tear from use would render an asset unusable in course of time.b) Assets lose their usefulness over a period of time, whether they are being used or not.c) The new inventions change in manufacturing methods, shifts in demand or services or any other condition make the

assets out of date d) All of these

16. Decrease in value of Assets by :a) By lapse of time b) By continuous use c) By accidents d) All of these

17. Match List I with List II and select the correct answer using the codes given below the Lists : List I List II a) Leasehold property 1. Depreciation fund method b) Mines, quarries, etc. 2. Annuity method c) The interest lost on the acquisition of an asset 3. Fixed installment method

d) To provide for replacement of assets at the end of its useful life. 4. Depletion method Codes :

CPT SANGITAS CLASSES ACCOUNT a b c d

a) 2 1 4 2b) 3 4 1 2c) 3 4 2 1d) 4 3 1 2

18. Which one of the following statements is correct ?a) Depreciation is not the process of valuation of asset – it is a process of allocation of cost of asset to the period of its

economic life.b) If the cost of machinery is more than the book value, than depreciation need not be provided. c) When the plant and machinery is maintained in good condition, through repairs and renewals, depreciation need not be

provided.d) In the absence of any legal provisions, if the auditor finds that provision made for depreciation is inadequate then he is not

required to refer to it in his report.

19. Under which one of the following methods of depreciation is the amount of the asset never reduced to zero ? a) Straight line method b) Diminishing balance method c) Sum of year digit method d) Annuity method

20. The main purpose of depreciation accounting is to :

a) Charge the cost of asset b) Allocate the cost of the asset over its estimated useful life c) Provide for replacement of the assets on the expiry of its useful life d) Value the assets on the closing date of the year

21. Which one of the following depreciation methods is most suitable for a coal mine ?a) Diminishing balance methods b) Depletion method c) Fixed installment method d) Sum of year’s digits method

22. Consider the following statements with respect to the sinking –fund method of depreciation :1. Depreciation is smaller than the Assets annual depreciation cost.2. Amount of interest constantly declines due to assets reducing balance.3. Annual net incidence on profit and loss account remains constant due to changing fixed depreciation.4. Periodic depreciation is recorded through the asset account.

Which of the above statements are correct ?a) 2 and 3 b) 1 and 3 c) 1,2 and 4 d) 2,3 and 4

23. An asset is never reduced to zero in the :a) Fixed installment method b) Reducing balance method c) Annuity method d) Sum of year’s method

24. The main objective of providing depreciation is to :a) Create secret reserves b) Reduce the book value of assets c) Value the assets properly d) Allocate cost of the

assets

25. If the total charge of depreciation and maintenance is considered. The method which would provide a uniform charge is a) Annuity method b) Straight line method c) Diminishing balance method d) Insurance policy method

26. What method is applied for investment :a) Annual valuation b) Diminishing balance c) Depreciation fund method d) All of these

27. Maximum depreciation and interest accumulate in sinking fund method : a) Asset Account b) Sinking Fund Account c) Bank Account d) All of these

28. In Diminishing Balance method : a) Depreciation decrease every year b) Depreciation increase every year c) Depreciation is constant every year d) All of these

29. Which of the following statement is correct ? a) Depreciation is a capital loss b) Interest is not received under Depreciation fund method. c) Depreciation is charged on Fixed and current asset d) Under Diminishing balance method the value of asset does not become zero at the end.

30. Which of the following is/are reason for depreciation ?a) Wears and tear b) Effluxion of time c) Obsolescence d) All of these

31. Which of the following is/are necessity for arrangement of depreciation : a) Determination of operating expenses b) For calculation correct profit c) For replacement of Asset d) All of these

32. The Determination of amount of depreciation of is based on : a) Determination of cost of the Asset b) Determination of Expected years of working life c) Determination of Assets Expected scrap-value d) All of these

CPT SANGITAS CLASSES ACCOUNT

FILL IN THE BLANK

33. Depreciation of fixed assets is an example of …….... expenditure. a) Revenue b) Deferred revenue c) Capital d) None of these

34. In the case of downward revaluation of an asset, which is for the first time revalued, ……….. account is debited. a) Fixed Asset b) Revaluation Reserve c) Profit & Loss account d) General Reserve

35. The portion of the acquisition cost of the asset, yet to be allocated is known as ……….. a) Written down value b) Accumulated value c) Realisable value d) Salvage value

36. The assumption underlying the fixed instaliment method of depreciation is that of ……….. of the asset over different years of its useful life. a) Usage b) Equal usage c) Charge d) None of these

37. Scrap value of an asset mean the amount that it can fetch on sale at the ……….. of its useful life. a) Beginning b) End c) Middle d) None of these

38. The number of production or similar units expected to be obtained from the use of an asset by an enterprise is called as a) Unit life b) Useful life c) Production life d) Expected life

39. In ………. method, depreciation is charged by allocating depreciable cost in proposition of the annual output to the probable life – time output.a) Working hours method b) Replacement method c) Revaluation method d) Production units method

SMALL PARAGRAPH BASED QUESTIONS

40. Under this method, the annual charge for depreciation decreases from year to year, so that the burden and benefits of later years are shared by the earlier years. Also, under this method, the value of asset can never be completely extinguished. The other advantage of this method is that the total charge to revenue is uniform when the depreciation is high. repairs are negligible; and as the repairs increase, the burden of depreciation gets lesser and lesser; This method of depreciation is :

a) Straight Line Method b) Written Down Value Method c) Annuity Method d) Sinking Fund Method

NUMERICAL QUESTIONS

41. Dinesh Garments purchased a machine for Rs. 50,000 and spent Rs. 6,000 on its erection. On the data 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 these

42. Amit Ltd. purchased a machine on 01.01.2003 for Rs. 1,20,000. Installation expenses were Rs. 10,000. Residual value after 5 years Rs. 5,000. On 01.01.2003, expenses for repairs were incurred to the extent of Rs. 2,000. Depreciation is provided under straight line method. Depreciation rate is 10%. Annual Depreciation will be :

a) Rs. 13,000 b) Rs. 17,000 c) Rs. 21,000 d) Rs. 25,000

43. A machine purchased on 1.4.2003 for Rs.10,00,000 was depreciation on straight line basis over its useful life of 10 years. On 1.4.2005, it was found that machine is in a good condition and will be used in the production for another 10 years. The amount of depreciation for the year, ending 31.3.2006 will be :

a) Rs. 1,00,000 b) Rs. 80,000 c) Rs. 83,333 d) Rs. 66.667

44. Out of four of building, ground floor is used as a store house for trading goods, first and second floor is used for office purpose and third floor is used for residential purposes. Total depreciation of a building of a building amounts to Rs. 80,000 . The depreciation amount of building to be shown in the business books will be :

a) Rs.80,000 b) Rs. 60,000 c) Rs. 40,000 d) Rs. 20,000

45. Depreciation amount of the machinery is Rs. 11,00,000.The machinery is expected to produce 30 lakhs units in its 10 year life and expected distribution of production units is as follows :

1-3 year 5 lacs units each year 4-6 year 3 lacs units each year 7-10 year 1-5 lacs unit each year. Annual depreciation for 1-3 year, using production units method will be : a) Rs. 1,10,000 b) Rs. 55,000 c) Rs. 65,000 d) Rs. 1,83,333

46. On 1.1.2005, a machine costing Rs. 10,000 and a piece of furniture costing Rs. 20,000 was purchased. Depreciation is provided @ 5% on furniture and 10% per annum on machine. The depreciation for the year ended 31 st March, 2005 should be :

a) Rs. 1,000 b) Rs. 300 c) Rs. 500 d) None of these

CPT SANGITAS CLASSES ACCOUNT 47. A Ltd. Company purchase machinery on 1 st April,2004 for Rs. 1,00,000. The depreciation on this machinery is charged @

10% per annum on straight line method. On 30 th October,2006 machinery is sold for Rs. 89,000. The profit or loss on sale of such machinery is :

a) Profit of Rs. 12,000 b) Loss of Rs. 12,000 c) Profit of Rs. 14,000 d) Loss of Rs. 6,000

48. Books of Ekta, shows on 1 st January, 2006 furniture Rs. 20,000. During the year a part of the furniture whose book value on 1 st January,2006 is Rs. 1,200 has been exchanged with another furniture by paying additional Rs. 500. Ekta charge depreciation @ 10% p.a. The net amount of the furniture to be shown in the balance sheet will be :

a) Rs. 18,508 b) Rs. 20,440 c) Rs. 18,396 d) Rs. 18,450

49. A machine purchased on 1 st April, 2004 for Rs. 10,000 is showing a balance of Rs. 6,000 as on 1 st April, 2006 when depreciation is charged on S.L.M. basis. Now a company wants to sitch over to W.D.V. method charging depreciation @ 20%. The amount of excess/short depreciation of last two year will be :

a) Excess depreciation Rs.400 b) Short depreciation Rs. 400 c) Excess depreciation Rs. 1,600 d) Short depreciation Rs. 1,600

50. On 1st January, 2005,Alpha Ltd. purchased a machine for Rs. 50,000 and spent Rs. 4,000 on its carriage and Rs. 2,000 on its installation. On the date of purchase, it was estimated that the effective life of the machine will be 10 year and after 10 years its scrap value will be Rs. 6,000. Depreciation is charged on straight line basis. Depreciation for the year 2005 will be :

a) Rs. 4,600 b) Rs. 5,000 c) Rs. 4,800 d) Rs. 4,500

51. Ashok purchased a machine on 01.01.2005 for Rs.1,20,000. Installation expenses were Rs. 10,000. Residual value after 5 year Rs.5,000. On 01.07.2005, expenses for repairs were incurred to the extent of Rs. 2,000. Depreciation is provided under straight line method. Annual Depreciation is :

a) 13,000 b) 17,000 c) 21,000 d) 25,000

52. Machinery costing Rs. 10,00,000 was purchased on 1.4.2006. The installation charges amounting Rs. 1,00,000 were incurred. The depreciation at 10% per annual on straight line method for the year ended 31 st March, 2007 will be :

a) Rs. 1,00,000 b) Rs. 2,00,000 c) Rs. 1,10,000 d) None of these

53. A firm purchases a 5 years lease for Rs. 40,000 on 1 st January. It decides to write off depreciation on the Annuity method Presuming the rate of interest to be 5% per annum. The annuity for it is 0.230975. The amt of annual depreciation will be :

a) Rs. 8,000 b) Rs. 2,000 c) Rs. 9,239 d) Rs. 6,000

54. The balance of machine on 31 st March, 2006 is Rs. 72,900.The machine was purchased on 1 st April, 2003 charging depreciation @ 10%p.a. The cost price of the machine as one 1 st April 2003 would be :

a) Rs. 1,00,000 b) Rs. 90,000 c) Rs. 81,000 d) Rs. 72,000

55. In the books of D Ltd. the machinery account shows a debit balance of Rs. 60,000 as on April 1, 2003. The machinery was sold on September 30, 2004 for Rs. 30,000. The company charges depreciation @ 20% p.a. on diminishing balance method. Profit/Loss on sale will be :

a) 13,200 profit b) 13,200 loss c) 6,800 profit d) 6,800 loss

56. If Ltd. purchased a machinery on April 01, 2000 for Rs. 3,00,000. It is estimated that the machinery will have a useful life of 5 year after which it will have no salvage value. If the company follows sum-of-the-years’-digits method of depreciation, the amount of depreciation charged during the year 2004-05 was :

a) Rs. 1,00,000 b) Rs. 80,000 c) Rs. 60,000 d) Rs. 20,000

57. A transport company purchases a truck for Rs.2,00,000 on 1 st January, 2005. It charges 20% depreciation p.a. according to W.D.V. method. The track was sold on 1 st July, 2006 for a sum of Rs. 1,60,000. The profit or loss on sale of truck is :

a) Loss of Rs. 16,000 b) Profit of Rs.16,000 c) Loss of Rs.12,000 d) Profit of Rs.12,000

58. A lease is purchased on 1 st January, 2005 for 4 years at a cost of Rs. 1,00,000. Lease is to be depreciated by the annuity method charging 5% interest. Annuity of Re. 1 over 4 years charging 5% interest is Re. 0.282012. The amount of annual depreciation will be :

a) Rs. 28,201 b) Rs.20,000 c) Rs. 25,000 d) None of these

59. The balance of furniture & fixture as on 1 st April, 2005 was Rs. 10,000. Furniture of Rs. 5,000 was purchased on 1st Oct, 2005. Depreciation is charged @ 10% on W.D.V. method The depreciation for the year ended 31 st March, 2006 will be :

a) Rs. 1,500 b) Rs. 1,250 c) Rs. 1,750 d) None of these

60. A machine purchased on 1 st January, 2003 at Rs. 15,00,000, having useful life of 15 years was depreciated on straight line basis. On 1 st January 2006, the same machine was revalued upward by Rs. 3 lacs. The amount of depreciation for the year 2006 will be :

a) Rs. 1,25,000 b) Rs. 1,00,000 c) Rs. 1,20,000 d) Rs.1,50,000

61. Original cost = Rs. 1,26,000; Salvage value = Nil; Useful life = 6 years. Depreciation for the first year under sum of years digits method will be :

a) Rs. 6,000 b) Rs. 12,000 c) Rs. 18,000 d) Rs. 36,000

62. Original cost = Rs. 1,26,000. Salvage value = 6,000. Useful Life = 6 year. Annual depreciation under SLM willl be

CPT SANGITAS CLASSES ACCOUNT a) Rs. 21,000 b) Rs. 20,000 c) Rs. 15,000 d) Rs. 14,000

63. What entry will be passed on depreciation transferred to profit and loss A/c: a) Profit and loss A/c Dr. b) Depreciation A/c Dr. To Depreciation A/c To Assets A/c c) Depreciation Reserve A/c Dr. d) Assets A/c Dr. To Assets A/c To Bank 64. Given : Cost of Assets Rs. 1,00,000 Scrap value Rs. 50,000 Estimated life of Assets 20 years The amount of depreciation will be : a) Rs. 80,000 b) Rs. 1,20,000 c) Rs. 30,000 d) None of these

65. What entry will be made on sale of assets?a) Bank A/c Dr. b) Assets A/c Dr.

To Assets To Profit and loss A/cc) Profit and loss A/c Dr. d) All of these

To Assets

66. Given : Plant Account of X and Co.

The rate of depreciation will be : a) 10% b) 20% c) 30% d) 40%

67. A company took over a seven year lease for Rs. 50,000. It was decided to recover cost by depreciation method at 4% interest. A reference to sinking fund table that Rs. 0- 12661 will amount to be 1 in 7 years. The amt of depreciation will be :

a) Rs. 6,330.50 b) Rs. 6,400 c) Rs. 7,600 d) Rs. 4,000

68. What entry will be made on depreciation provided ? a) Depreciation A/c Dr. b) Assets A/c Dr. To Assets A/c To Depreciation A/c c) Assets A/c Dr. d) Bank A/c Dr. To Assets A/c To Profit and loss A/c 69. Given : Cost of Machine Rs. 1,00,000 Estimated working life 20 years Scrape value Nil What will be amount of depreciation for 3 rd year ? a) Rs. 5,000 b) Rs. 10,000 c) Rs. 15,000 d) All of these

70. A firm contracted to purchase on 1 st January, 2006 a three years lease of a Machine for Rs. 1,00,000 and decided to replace in by means of a Depreciation Fund, the investment yielding 3% interest P.A. An annuity of Rs. 1 at 3% P.A. amount of Rs. 3.0909 in three years. The amount of depreciation will be :

a) Rs. 40,000 b) Rs. 35,000 c) Rs. 32,354 d) Rs. 36,000

71. Given : Plant and Machinery (Dep. rate 5%) 1,00,000 Land and Building (Dep. rate 15%) 80,000 The total amount of depreciation will be : a) Rs. 12,000 b) Rs. 7,000 c) Rs. 3,000 d) None of these

72. On using reducing balance method on as asset of Rs. 20,000 at the rate of 10% per annum, depreciation of 3 rd year will be a) Rs. 6,000 b) Rs. 1,800 c) Rs. 1,620 d) Rs. 2,000

73. The cost of a machine is Rs. 70,000. It has 10 – year life at the end of which it is expected to realise Rs. 5,000. The depreciation for first four years on a straight line basis is :

a) Rs. 28,000 b) Rs.26,000 c) Rs. 22,000 d) Rs. 20,000

74. An asset is purchased for Rs. 50,000 on which depreciation is to be provided annually according to the straight line method. The useful life of the asset is 10 years and the residual value is Rs. 10,000. The rate of depreciation is :

a) 20% b) 18% c) 10% d) 8%

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Date Particulars Amt. Rs. Date Particular Amt.2006 Apr. 1 To Bank A/c 20,000 2007 Mar.31 By Depreciation By

Balance c/d 2,00018,000

20,000 20,000

CPT SANGITAS CLASSES ACCOUNT

DEPRECIATION – HOMEWORK - ANSWERS

1. (c) 21. (b) 41. (a) 61. (d)2. (c) 22. (b) 42. (a) 62. (b)3. (b) 23. (b) 43. (b) 63. (a)4. (d) 24. (d) 44. (b) 64. (d)5. (d) 25. (b) 45. (d) 65. (d)6. (a) 26. (a) 46. (c) 66. (a)7. (c) 27. (b) 47. (c) 67. (a)8. (c) 28. (a) 48. (d) 68. (a)9. (c) 29. (d) 49. (a) 69. (a)10. (c) 30. (d) 50. (b) 70. (c)11. (d) 31. (d) 51. (d) 71. (d)12. (d) 32. (d) 52. (c) 72. (c)13. (a) 33. (a) 53. (c) 73. (b)14. (b) 34. (c) 54. (a) 74. (d)15. (d) 35. (a) 55. (b)16. (d) 36. (b) 56. (d)17. (c) 37. (b) 57. (b)18. (a) 38. (b) 58. (a)19. (b) 39. (d) 59. (b)20. (b) 40. (b) 60. (a)