Tag: depreciation and causes of depreciation

Questions Related to depreciation and causes of depreciation

Leasehold property is generally depreciated by ______________.

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. Annuity method

  2. Fixed installment method

  3. Written down value method

  4. Insurance policy method

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Correct Option: A
Explanation:

Annuity method is particularly applicable to those assets whose cost is heavy and life is long and fixed, e.g. leasehold property, land and building etc.


The annuity method of depreciation is also referred to as the compound interest method of depreciation.

 If the cash flow of the asset being depreciated is constant over the life of the asset, then this method is called the annuity method.

Given that the value of furniture on $1-1-2001$ is $Rs. 80,000$ furniture purchased during the year is $Rs. 40,000$, sale of furniture on no loss on profit basis is $Rs. 20,000$ and the furniture is valued at $Rs. 70,000$ on $31.12.2001$, the depreciation for the year $2001$ will be _______________.

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. $Rs. 10,000$

  2. $Rs. 30,000$

  3. $Rs. 50,000$

  4. $Rs. 70,000$

Show answer
Correct Option: B
Explanation:

Depreciation = opening value + purchase - sale - closing value 
                       = 80000 + 40000 - 20000 - 70000 

                       = 30000.

The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of providing depreciation to another is made only ______________.

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. If the adoption of the new method is required by statute

  2. For compliance with an accounting standard

  3. If it is considered that the change would result in a more appropriate preparation or presentation of the financial/ statements of the enterprise

  4. All of the above

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Correct Option: D

Match the followings:

List I List II
A. Amortization 1. Diminution in the life of the asset due to excessive use
B. Depreciation 2. Exhaustion of natural resources
C. Depletion 3. Expiration of tangible assets
D. Obsolescence 4. Expiration of intangible assets
5. Economic deterioration due to improved inventions
depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. $A = 1, B = 2, C = 3, D = 4$

  2. $A = 1, B = 2, C = 4, D = 5$

  3. $A = 5, B = 2, C = 3, D = 4$

  4. $A = 4, B = 3, C = 2, D = 5$

Show answer
Correct Option: D
Explanation:

Option D is the Correct one.

1. Depreciation charged on fixed tangible assets.ex. Machinery, Furniture, etc
2. Amortization charged on fixed intangible assets. ex Goodwill copyright etc
3. Depletion charged on Exhaustion of natural resources ex. coal mines etc
4. Obsolescence is economic deterioration due to improved inventions.

In which of the following method, the asset appears at its original cost throughout its life?

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. Machine hour rate

  2. Straight line

  3. Depreciation fund

  4. Annity

Show answer
Correct Option: C
Explanation:

Option C is the correct one.

In the Depreciation Fund method every year, the fund invests an amount of money equal to an existing asset's depreciation allowance in gilt-edged securities, giving the company money that can be used to buy new assets.

Leasehold property is generally depreciated by ___________.

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. Annuity method

  2. Fixed instatement method

  3. Reducing balance method

  4. Insurance policy method

Show answer
Correct Option: A

The amount of annual instalment to depreciation funds is ______________.

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. A charge against profits

  2. An appropriation of profits

  3. May be charge or appropriation of profits

  4. Neither a charge nor appropriation of profit

Show answer
Correct Option: A
Explanation:

Option A is the correct one.

The annual charge to profit and loss account/income statement for depreciation(it’s charge against profit) is based upon an estimate of how much of the overall economic usefulness of a fixed asset has been used up in that accounting period.

Revaluation system of depreciation should be used:

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. In case of big size assets

  2. In case of assets which are subject to normal wear and tear

  3. Where the asset is represented by a large number of small and diverse items of small unit cost

  4. Where the amount invested in asset is pretty large

Show answer
Correct Option: C
Explanation:

Option C is the correct one.

Revaluation method of depreciation. The value of the asset on which depreciation charge is to be calculated is assessed both at the start and at the end of the year and any revaluation losses arising during the year are considered as the depreciation charge.

Annuity method is much suited to those assets _____________.

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. which required considerable investment

  2. where additions are not made

  3. Both (a) and (b)

  4. None of these

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Correct Option: C

Interest is debited to asset account in ______________.

depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

  1. Insurance policy method

  2. Diminishing balance method

  3. Depletion method

  4. Annuity method

Show answer
Correct Option: D
Explanation:

By using an asset, one loses not only the money spent on acquiring it but also the interest which would have been earned on the money. Therefore, depreciation should cover not only the cost of the asset but also an appropriate amount for interest. This is done in annuity method. Interest is calculated on the book value of the asset at the proper  rate and debited to asset. The amount is credited to interest account, which then goes to the credit side of the profit and loss account.