Tag: accounting for depreciation

Questions Related to accounting for depreciation

X Ltd. purchased a machine for Rs. 1,20,000 and incurred Rs. 40,000 towards freight, insurance, carriage Inwards and installation charges. It was estimated that its life is 4 years during which period is sum of Rs. 60,000 is likely to be spent on its repairs maintenance and at the end of useful life, the scrap value will be Rs. 20,000. Actual repairs were as under:
Year I -Rs. Nil, Year -II Rs. 10,000, Year -III Rs. 20,000, Year -IV Rs. 30,000
At the end of useful life, the scrap value of the machine released Rs. 16,000 only. 
The closing balance of Provision for Depreciation and Repairs Account at the Year II will be:

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. Rs. 50,000

  2. Rs. 1,00,000

  3. Rs. 40,000

  4. Rs. 90,000

Show answer
Correct Option: D

Which of the following are applicable to sinking fund method of depreciation?
I. Periodic depreciation is smaller than the assets, actual annual depreciation cost.
II. Amount of interest constantly declines due to assets, reducing balances.
III. Annual net incidence on profit and loss account remains constant due to incorporation of only fixed depreciation.
IV. Periodic depreciation is recorded through the assets account.
Select the correct answer using the codes given:

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. II and IV

  2. I and III

  3. I, II and III

  4. II, III and IV

Show answer
Correct Option: B
Explanation:

Option B is  the correct one.

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.



Leasehold property is generally depreciated by _________.

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. Annuity method

  2. Fixed installment method

  3. Reducing balance method

  4. Insurance polity method

Show answer
Correct Option: A
Explanation:

By leasehold it means the property is taken on lease for a certain number of years. The most general duration is 99 years, but may be less or much more. The lump sum is paid in advance at the time of taking the lease. This should be regarded by the lessee as the capitalized value of an annuity during the life time of the lease. Depreciation is based on such annuity and is generally a fixed amount every year. 

In which method of calculating depreciation, interest on the cost of the asset is taken into account?

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. Annuity method.

  2. Fixed installment.

  3. Insurance policy.

  4. Sinking fund.

Show answer
Correct Option: A
Explanation:

Depreciation is defined as the expensing of the cost of an asset involved in producing revenues throughout its useful life.

There are various method of calculating depreciation such as straight line method, Wriiten down value of assets method, sinking fund method, Annuity method, etc.

The annuity method of depreciation is a process used to calculate depreciation on an asset by calculating its rate of return as if it was an investment. This method requires the determination of the internal  rate of return (IRR) on the cash inflows and outflows of the asset. The IRR is then multiplied by the initial book value of the asset, and the result is subtracted from the cash flow for the period in order to find the actual amount of depreciation that can be taken. It is commonly used with assets that have a large purchase price and long life.

Which of the following statement is correct?

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. A company need not provide for depreciation if it does not want to declare dividends.

  2. Depreciation has to be provided for if dividends are to be declared

  3. The fact that depreciation has not been provided for together with the quantum of arrears of depreciation must be stayed by way of notes.

  4. All of the above

Show answer
Correct Option: D
Explanation:

Section 123 of the Companies Act 2013 says that a company can declare dividend from:

  • Out of profits (after depreciation) or out of accumulated profits (after depreciation) or from both
  • Out of the money provided by the government if guarantee given by the government
  • Out of free reserves
  • Depreciation to be provided according to schedule II of the act
Considering the above clause of Section 123, all the given 3 statements are correct.

M/s sam Co. purchased Machinery on 1st oct 2015 for Rs. 100000 and paid for installation Rs. 20000
Depreciation under written down value Method 10%
Ascertain the Accumulated Depreciation balance as on 31st mar 2018 ______.

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. $27,660$

  2. $27,600$

  3. $27,750$

  4. $27,000$

Show answer
Correct Option: A
Explanation:

When the depreciation is charged by creating accumulated depreciation account, following journal entry is passed:


Depreciation A/c                                 Dr.
   To Accumulated Depreciation A/c 

In the given situation, Machinery purchased on 1st Oct 2015 for Rs.100000 and installation paid Rs.20000. Depreciation is charged under written down value method @10%. Depreciation account will be debited every year by and credited to accumulated depreciation a/c . 

Depreciation will be calculated as: 

Cost of the machinery including installation;                                      Rs.120000
Less: Depreciation F.Y. 2015-16 for 6 months @10% on Rs.120000 : Rs.6000                                                                                                                    ------------------
W.D.V. as on 1st April 2016                                                                   Rs.114000
Less: Depreciation for  F.Y. 2016-17  @10% on Rs.114000:                  Rs. 11400
                                                                                                              ------------------
W.D.V. as on 1st April 2017                                                                   Rs.102600
Less; Depreciation F.Y. 2017-18  @10% on Rs.102600                        Rs. 10260
                                                                                                              ----------------

Total in accumulated depreciation a/c will be as follows:                           
For F.Y. 2015-16                           Rs.6000
For F.Y. 2016-17                           Rs.11400
For F.Y. 2017-18                           Rs.10260
                                                   ----------------
Total                                             Rs.27660

Balance in accumulated depreciation account as on 31st March 2018 will be Rs.27660 under written down value method.

M/s Ram Co. purchased Machinery on 1st April 2015 for $Rs.100000$
Depreciation under Straight Line Method $10$%.
Ascertain the Accumulated Depreciation balance as on 31st mar 2018.

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. $Rs.25000$

  2. $Rs.30000$

  3. $Rs.10000$

  4. $Rs.50000$

Show answer
Correct Option: B
Explanation:

When the depreciation is charged by creating accumulated depreciation account, following journal entry is passed:


Depreciation A/c                                 Dr.
   To Accumulated Depreciation A/c 

In the given situation, depreciation is charged @$10$% on $Rs.100000$ under straight line method, depreciation account will be debited every year by Rs.10000 and credited to accumulated depreciation a/c . 

For F.Y. 2015-16            $Rs.10000$
For F.Y. 2016-17            $Rs.10000$
For F.Y. 2017-18            $Rs.10000$

Balance in accumulated depreciation account as on 31st March 2018 will be $Rs.30000$.

M/s Sam & Co. purchased Machinery on $1. 10. 2015$ for $Rs.1,00,000$ and paid for installation $Rs.20,000$
Depreciation under Straight Line Method $10$%.
Ascertain the Accumulated Depreciation balance as on $31.03.2018$ ?

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. $Rs.50,000$

  2. $Rs.40,000$

  3. $Rs.55,000$

  4. $Rs.30,000$

Show answer
Correct Option: D
Explanation:

When the depreciation is charged by creating accumulated depreciation account, following journal entry is passed:


Depreciation A/c                                 Dr.
   To Accumulated Depreciation A/c 

In the given situation, Machinery purchased on 1st Oct 2015 for Rs.100000 and installation paid Rs.20000. Depreciation is charged under straight line method @10%. Depreciation account will be debited every year by and credited to accumulated depreciation a/c . 

For F.Y. 2015-16 for 6 months @10% on Rs.120000 :            Rs.6000
For F.Y. 2016-17  @10% on Rs.120000:                                  Rs. 12000
For F.Y. 2017-18  @10% on Rs.120000                                   Rs. 12000
                                                                                                ----------------
Total in accumulated depreciation a/c                                 Rs.30000

Balance in accumulated depreciation account as on 31st March 2018 will be Rs.30000.

M/s Ram Co. purchased Machinery on 1st April 2015 for Rs. 100000
Depreciation under Written down value method 10%
Ascertain the Accumulated Depreciation balance as on 31st mar 2018______.

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. $Rs..27,100$

  2. $Rs.27,000$

  3. $Rs.27,500$

  4. $Rs.27,200$

Show answer
Correct Option: A
Explanation:

                                             Accumulated Depreciation Account

 Date  Particulars  Amount  Date  Particulars Amount 
31.03.2016 To Balance C/d     10000 31.03.2016   By Depreciation  10000
   Total   10000    Total   10000
 31.03.2017  To Balance c/d   19000  01.04.2016  By Balance b/f  10000
       31.03.2017 By Depreciation   9000
   Total  19000     Total   19000
 31.03.2018  To Balance c/d   27100  01.04.2017  By Balance b/f   19000
       31.03.2018  By Depreciation  8100
   Total   27100    Total  27100
 

Total depreciation during the life cannot exceed _____________.

book keeping and accountancy accounting for depreciation factors for determining depreciation factors of depreciation need for depreciation and the factors affecting the amount of depreciation

  1. its book value

  2. its replacement value

  3. its depreciable value

  4. market value

Show answer
Correct Option: C
Explanation:

The main purpose of depreciation is to reduce the value of an asset over its useful life in such a systematic way that such reduction corresponds with the rate at which depreciation is charged. So the total depreciation over the period of use or simply accumulated depreciation cannot exceed the net book value of the asset or depreciable value.