Tag: need for depreciation and the factors affecting the amount of depreciation

Questions Related to need for depreciation and the factors affecting the amount of depreciation

If the rate of depreciation is same then the amount of depreciation is same then the amount of depreciation under straight line method vis-a-vis written down value method 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. Equal in all years

  2. Equal in first year but higher in subsequent years.

  3. Equal in the first year but lower in subsequent years.

  4. Lower in the first year but equal in subsequent years.

Show answer
Correct Option: B
Explanation:

Fixed Installment Method or Equal Installment Method or Straight Line Method or Fixed Percentage on Original Cost Method: In this method a fixed or equal amount of depreciation written off as depreciation at the end of each year, during the life time of the asset.

Written-down value can be calculated by a method of depreciation that is sometimes called the diminishing balance method. This accounting technique reduces the value of an asset by a set percentage each year.  When selling the asset, the book value is used to help determine the minimum value for which it will be sold.

Useful life of a depreciable asset should be estimated after considering certain factors. Which of the following factors is not mentioned by Accounting Standard-6 ?

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. Expected physical wear and tear

  2. Fall in market price

  3. Obsolescence

  4. Legal or other limit on the sue of the asset

Show answer
Correct Option: B
Explanation:

Accounting standard 6 deals with depreciation accounting. The useful life of a depreciable  assets should be estimated after considering the following factors:

1) Expected physical wear & tear
2) Obsolescence
3) Legal or other limits on the use of asset

But the fall in market price is not mentioned in the Accounting Standard 6. 

Method of depreciation selected __________.

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. must be applied consistently till end of life

  2. may be changed by the enterprise whenever it wants

  3. may be changed only under special circumstance

  4. may be changed with the permission of the authorities

Show answer
Correct Option: C
Explanation:

Concept of consistency of accounting defines that the accounting methods used by the organization has to be consistent. Like if the depreciation is charged on written down value method, this has to followed consistently year on year basis. 

Change of method has to be done only under special circumstance.  If  due to change of method, any material change happened, this has to be notified under notes to account. 

Complete the formula by filling the correct option in the numerator:

Rate of depreciation =  ____________________________   * 100
                                                    Acquisition cost

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. Annual depreciation cost

  2. Cost of asset

  3. Asset - Liabilities

  4. Net Asset

Show answer
Correct Option: A
Explanation:

Depreciation is provided on fixed assets on account of were and tear of the asset by suing them. Depreciation is provided on assets based on the useful life of the assets.  


Depreciation rate is calculated as:

Rate of Depreciation= Annual depreciation cost  *100
                                         Acquisition cost

 Under Written Down Value Method depreciation is charged on ________ of the asset.

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. Historical cost

  2. Written down value

  3. Original cost

  4. None of the above

Show answer
Correct Option: B
Explanation:

Under the written down value method, depreciation calculated at a fixed percentage on the original cost (in the first year) and on the written down value, (in subsequent years) of fixed depreciable asset is written off during each accounting period over the expected useful life of asset. Under this method, the rate of deprecition remains constant year after year whereas the amount of depreciation goes on decreasing.

The original cost of the asset is Rs. 6,00,000 and depreciation is charged @ 10% p.a. at written down value, then the amount of depreciation in 3rd year 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.54000

  2. Rs.48600

  3. Rs.60000

  4. Rs.49000

Show answer
Correct Option: B
Explanation:
Under written down value of method of charging depreciation, depeciation is calculated on WDV as follows:
              Original cost                                                                            Rs. 600000
Less : Depreciation @ 10% p.a.                                                                   (60000)
         Written Down Value                                                                           540000
Less : Depreciation @ 10% p.a.                                                                   (54000)
          Written Down Value                                                                          486000
Less : Depreciation @ 10% p.a.                                                                   (48600)
           Written Down Value                                                                         497400
Depreciation in third year under WDV method is Rs. 48600

The amount of depreciation charged on a machinery will be debited to:

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. Machinery account

  2. Depreciation account

  3. Cash account

  4. Repair account

Show answer
Correct Option: B
Explanation:

Depreciation is the permanent and continuous decrease in the book value of a depreciable fixed asset due to use, effluxion of time, obsolescence, expiration of legal rights or any other cause.

Journal entry for charging depreciation is :
   Depreciation A/c       Dr. 
          To Asset/ Machinery A/c

 The original cost of the asset is Rs. 2,50,000. The useful life of the asset is 10 years and net residual value is estimated to be Rs. 50,000. Now, the amount of depreciation to be charged every year 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.21000

  2. Rs.20000

  3. Rs.25000

  4. Rs.19000

Show answer
Correct Option: B
Explanation:

Formula for calculating depreciation is :

Depreciation = (Cost of asset - Scrap value)/ Useful life of asset
Depreciation = Rs. (250000 - 50000)/ 10 years
Depreciation = Rs. 20000

The amount realised at the end of working life of an asset is known as ____________ .

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. Residual value

  2. Market price

  3. Original cost

  4. Written down value

Show answer
Correct Option: A
Explanation:

In accounting, the residual value is an estimated amount that a company can acquire when they dispose off an asset at the end of its useful life

The books value of an asset is obtained by deducting depreciation from its __________.

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. Market value

  2. Market + Cost price

  3. Cost

  4. Scrap value

Show answer
Correct Option: C
Explanation:

Book value is the value of a security or asset as entered in the firm's books. Book value is the value of an asset according to its balance sheet balances. An asset's initial book value is its acquisition cost. Every year depreciation is deducted from that value. 

So the book value of an asset is obtained by deducting depreciation from its cost price.