Question by C.A. (Dr.) G.S.Grewal – Series 14
- Depreciation is the process of allocation of cost of the assets over its estimated useful life.
- The amount of depreciation declines every year under __________.
- Out of these, on which of the following depreciation is charged?
a) Fixed Assets
b) Current Assets
c) Liquid Assets
d) Fictitious Assets
Answer – Series 14
Reason: Assets are recorded at historical cost and are depreciated over its useful life. A prime reason for depreciation is wear and tear due to its use in the business. Thus, depreciation is a process of allocation of cost of assets over its life.
- Written-down value method
Reason: Depreciation is charged on the fixed assets alone as current assets and liquid are reflected at lower of cost or realisable value. Fictitious Assets are amortised over their period it is expected to be useful.
Question – Series 25
- Depreciation arises because of fall in the value of the asset.
- An asset was purchased for ₹10,000 on which depreciation was provided @ 5% on Straight Line Method, the W.D.V. of the asset at the end of two years will be ________.
- The objective of providing depreciation is to
(a) Show correct profit for the year
(b) Show the true financial position in the balance sheet
(c) Reduce tax burden
(d) Comply with legal requirements
Answer – Series 25
Reason: Depreciation arises because of wear and tear, obsolescence, passage of time etc.
- ₹ 9,000
Reason: Depreciation is fall in the book value of assets due to wear and tear or obsolescence. It is written off in a systematic manner over its estimated useful life. If depreciation is not written off every year, profit will be overstated.
Question – Series 69
- Depreciation is a non-cash expense.
- Depreciation is charged either by ________ or_______.
- Depreciation arises due to
(a) Efflux of time.
(b) Fall in the market value of an asset.
(c) Fall in the value of money.
(d) Increase in the Market Value of an asset.
Answer – Series 69
Reason: Depreciation is an expense like any other expense. However, it is not a cash expense since it does not involve outflow of cash. It is charge on profit and should be provided to determine the correct profit or loss.
- Written Down Value Method, Straight Line Method.
Reason: Some assets have a definite life period like lease, on the expiry of the life, the asset will cease to exist. Other assets like plant and machinery may not have a definite life, in their case the life is estimated.
Question – Series 70
- One of the objectives of providing depreciation is to calculate correct profit.
- Depreciation means _______ in the book value of fixed assets.
- The amount of depreciation charged on machinery is debited to
(a) Depreciation Account.
(b) Machinery Account.
(c) Provision for Depreciation Account.
(d) General Expenses Account.
Answer – Series 70
Reason: Allocation of cost of Depreciation is fixed assets over its estimated useful life. It is an expense of the business and a charge against profit. Profit and Loss Account for the accounting period will not give correct profit of the business (i.e., net profit/net loss), if it is not charged.
Reason: The amount of depreciation charged on machinery is debited to Depreciation Account being an expense.
Question – Series 92
- Property, Plant and Equipment are conventionally presented in the Balance Sheet at historical cost less depreciation.
- Prem enterprise purchased a machine for ₹ 1,00,000 on 1st April 2017. Depreciation is provided @ 10% on written down value method. The depreciation provided on the machine in the year ended March 31st, 2019 will be __________.
- Depreciation is provided on which of the following asset:
(a) Fixed Assets
(b) Current Assets
(c) Wasting Assets
(d) Intangible Assets
Answer – Series 92
Reason: According to the Historical Cost Concept, assets are recorded at the purchase cost. Depreciation is the process of writing off cost of asset over its expected useful life to the Profit and Loss Account. The assets are shown in the balance sheet at its historical cost less depreciation charged thereon.
- ₹ 9,000
Reason: Depreciation is provided on the fixed assets alone as current assets shown are at lower of cost or realisable value. Wasting Assets are depleted while Intangible Assets are amortised their period it is expected to be useful.