Tag: depreciation, provision and reserve

Questions Related to depreciation, provision and reserve

Depreciation is generally provided on ______________.

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

  1. Current Assets

  2. Fixed Assets

  3. Loan & Advances

  4. Fixed Liabilities

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Correct Option: B
Explanation:

Depreciation of property :- It is calculated as the 'factor' product of the total value of the property with the age of construction. The depreciation factor remains valid only for the concrete structures and not land.

On which of the following asset depreciation cannot be provided?

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

  1. Building

  2. Land

  3. Mines

  4. Loose tools

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Correct Option: B
Explanation:

The land asset is not depreciated, because it is considered to have an infinite useful life. 

During this useful life, they are depreciated, which reduces their cost to what they are supposed to be worth at the end of their useful lives (which is known as salvage value).

Amortization applies to ________________.

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

  1. Current Assets

  2. Wasting Assets

  3. Intangible Assets

  4. Non - Current Assets

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Correct Option: C
Explanation:

Amortization of intangibles is the process of expensing the cost of an intangible asset over the projected life of the asset. Intangible assets, such as patents and trademarks, are amortized into an expense account. Tangible assets are posted to expenses through depreciation.

Which of the following is/are the important characteristic of depreciation?

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

  1. Depreciation is sudden loss

  2. Depreciation is a appropriation of profit

  3. Depreciation is one of the methods for valuation of fixed assets

  4. None of the above

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Correct Option: D

Which of the following is/are not the important characteristic of depreciation?

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

  1. Total depreciation can exceed its depreciable value or original cost

  2. Depreciation is calculated in respect of fixed assets only

  3. Depreciation is always computed in a systematic and rational manner

  4. All of the above

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Correct Option: A
Explanation:

Depreciation is thus the decrease in the value of assets and the method used to reallocate, or "write down" the cost of a tangible asset (such as equipment) over its useful life span.

Under which of the following method depreciation is charged uniformly?

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

  1. Insurance policy method

  2. Annuity method

  3. Depreciation fund method

  4. All of the above

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Correct Option: D
Explanation:

Insurance Policy Method  In this method, instead of purchasing securities, an insurance policy is purchased for an amount equal to the cost of replacement of asset.

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.  As such, the interest is charged on the diminishing balance of the asset.
The sinking fund method is a technique for depreciating an asset while generating enough money to replace it at the end of its useful life. As depreciation charges are incurred to reflect the asset's falling value, a matching amount of cash is invested. 


Which of the following is/are not the objectives of providing depreciation?

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

  1. To create secrete reserve

  2. To derive maximum tax benefit

  3. To ascertain the proper cost of the product

  4. All of the above

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Correct Option: A
Explanation:

Secret reserve helps in eliminating unhealthy competition by not showing true profit to the competitors.  

The existence of secret reserve is known to the management only and not to the real owners or shareholders. *Secret reserve makes the information of financial statements false and inaccurate.

Which of the following statements is/are false?
(I) The term 'depreciation', 'depletion' and 'amortization' convey the same meaning.
(II) Provision For Depreciation A/c debited when Provision For Depreciation A/c is created.
(III) The main purpose of charging the Profit & Loss A/c with the amount of depreciation is to spread the cost of an asset over its useful life for the purpose of income determination.
The correct option is -

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

  1. Only (I) of the above

  2. Only (II) of the above

  3. Only (III) of the above

  4. All (I),(II) and (III)

Show answer
Correct Option: D
Explanation:

    (I)  Prorating cost of an “Intangible Asset” over the period during which benefits of this asset are estimated to last is called Amortization. The concept of amortization is also used with leases & debt repayment. Amortization is for Intangible assets  Depletion is for natural resources such as timber and oil.  Depreciation = related to tangible assets, e.g. property, plant and equipment.

   (II)  Assets is a debit balance on the TB. Therefore, provision for depreciation of a fixed asset is a credit balance. Provision for depreciation reduces the balance of a fixed asset. Therefore, it must be credited to reflect such reduction.
  (III)  The purpose of depreciation is to achieve the matching principle of accounting. That is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset.

Which of the following statement is incorrect?

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

  1. Depreciation is the expense charged to profit and loss account before arriving at the net profit of the year

  2. The cost of fixed asset in the form of depreciation has to be matched against the revenues of the years over which the asset is used

  3. Depreciation means appointment or allocation of the cost of the fixed asset over its useful life

  4. None of the above

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Correct Option: D

Under which of the following method depreciation charged declines?

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

  1. Diminishing balance method

  2. Sum of year digit method

  3. Double decline method

  4. All of the above

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Correct Option: D
Explanation:

Diminishing Balance Method of Calculating Depreciation :- Under this method, the amount of depreciation is calculated as a fixed percentage of the reducing or diminishing value of the asset standing in the books at the beginning of the year, so as to bring down the book value of the asset to its residual value.


The sum of years' digits method is a form of accelerated depreciation that is based on the assumption that the productivity of the asset decreases with the passage of time. Under this method, a fraction is computed by dividing the remaining useful life of the asset on a particular date by the sum of the year's digits. 

Double declining balance method is a form of an accelerated depreciation method in which the asset value is depreciated at twice the rate it is done in the straight-line method.