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.