Tag: reserve and fund

Questions Related to reserve and fund

The profit on depreciation policy is transferred to ________________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Depreciation fund account

  2. Asset account

  3. Profit and loss account

  4. Depreciation account

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Correct Option: A
Explanation:

Sinking fund method is used when the cost of replacement of an asset is too large. Depreciation is charged every year to the profit and loss A/c. But, it may sometimes happen that the amount is not readily available at the time of purchase of the new asset. 


Thus, the sinking fund method is used.Under this method, the amount of depreciation charged every year is transferred to the sinking fund account. This amount is then invested in Government securities. Also, the interest earned on these securities is reinvested.

The amount of depreciation to be charged every year is calculated after considering the element of interest. The interest will be earned on the amount which is invested every year and will remain invested till the useful life of the asset.


Loss on the sale of machinery should be written off against _______.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Share Premium Account

  2. Sales Account

  3. Depreciation Fund Account

  4. General Reserve Account

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Correct Option: C
Explanation:

According to the Diminishing Balance Method, depreciation is charged at a fixed percentage on the book value of the asset. As the book value reduces every year, it is also known as the Reducing Balance Method or Written-down Value Method.

Since the book value reduces every year, hence the amount of depreciation also reduces every year. Under this method, the value of the asset never reduces to zero.

When the amount of depreciation charged under this method and the corresponding period are plotted on a graph it results in a line moving downwards.

This method is based on the assumption that in the earlier years the cost of repairs to the assets is low and hence more amount of depreciation should be charged. Also, in the later years, the cost of repairs will increase and therefore less amount of depreciation shall be provided. 

Hence, this method results in an equal burden on the profit every year during the life of the asset.

However, under this method, if the rate of depreciation applied is not appropriate it may happen that at the end of the useful life of the asset full depreciation is not provided.

Also, while applying this method, the period of use of the asset should be considered. If an asset is used only for 2 months in a year then depreciation will be charged only for 2 months.

Which of the following is a double entry for depreciation expenses?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Accumulated depreciation debit and depreciation expenses credit.

  2. Depreciation expenses debit and accumulated depreciation credit.

  3. Cash debit and depreciation expenses credit.

  4. Depreciation expenses debit and cash credit.

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Correct Option: B

Which of the following is the normal balance of an accumulated depreciation account?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Debit balance.

  2. Credit balance.

  3. Nil balance.

  4. (A) or (B).

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Correct Option: B

Accumulated Depreciation account has a _____________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. credit balance only

  2. debit balance only

  3. credit or debit balance

  4. all of the above

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Correct Option: A
Explanation:
Accumulated depreciation is a contra asset. Since assets have a normal debit balance, this would make accumulated depreciation have a normal credit balance. This account should be a credit balance as it is a contra-asset account.

If the asset is sold, the provision for depreciation  relating to the asset sold is transferred to _______.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Asset Account

  2. Liability Account

  3. P and L Account

  4. Trading Account

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Correct Option: A

An alternative term used for accumulated depreciation expenses?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Provision for depreciation.

  2. Cumulative depreciation.

  3. Targeted depreciation.

  4. Depletion.

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Correct Option: A

In case the depreciable assets are revalued, the provision for depreciation is based on _____________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. The revalued amount on the estimate of the remaining' useful life of such assets

  2. Original cost of the assets

  3. Depreciated value of the assets

  4. $AS-6$ is silent in this regard

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Correct Option: A

A machine was purchased on 1.5.2013 for Rs. $20,000$ (installation expenses Rs. $1,000$) was fully destroyed in an accident on 1.9.2015. Company provides depreciation @ $15$% p.a on reducing balance method and close accounts on 31st March each year. Which of the following journal entry is correct?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. $\begin{matrix} Accidental\quad Loss\quad A/c & Dr.\quad 18,113 \ To\quad Machinery\quad A/c & \quad \quad \quad \quad \quad \quad \quad \quad 18,113 \end{matrix}$

  2. $\begin{matrix} Accidental\quad Loss\quad A/c & Dr.\quad 15,396 \ To\quad Machinery\quad A/c & \quad \quad \quad \quad \quad \quad \quad \quad 15,396 \end{matrix}$

  3. $\begin{matrix} Profit\quad and\quad Loss\quad A/c & Dr.\quad 14,434 \ Depreciation\quad A/c & Dr.\quad \quad \quad 962 \ To\quad Machinery\quad A/c & \quad \quad \quad \quad \quad \quad \quad \quad \quad 15,396 \end{matrix}$

  4. $\begin{matrix} Machinery\quad A/c & Dr.\quad 14,434 \ Accidental\quad Loss\quad A/c & Dr.\quad 6,566 \ To\quad Machinery\quad A/c & \quad \quad \quad \quad \quad \quad \quad \quad \quad 21.000 \end{matrix}$

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Correct Option: C

When Provision for Depreciation Account is maintained, the annual charge for depreciation shall be _________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. debited to Provision for Depreciation Account and credited to Profit and Loss Account

  2. credited to Asset Account and debited to Profit and Loss Appropriation Account

  3. debited to Asset Account and credited to Profit and Loss Appropriation Account

  4. debited to Profit and Loss Account and credited to Provision for Depreciation Account

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Correct Option: D