Tag: reserve and fund

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Questions Related to reserve and fund

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

The profit on depreciation policy is transferred to ________________.

  1. Depreciation fund account

  2. Asset account

  3. Profit and loss account

  4. Depreciation account
Reveal answer Fill a bubble to check yourself
A Correct answer
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.


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

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

  1. Share Premium Account

  2. Sales Account

  3. Depreciation Fund Account

  4. General Reserve Account
Reveal answer Fill a bubble to check yourself
C Correct answer
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.

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

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

  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.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The standard journal entry for depreciation is to debit the depreciation expense account (to record the cost) and credit the accumulated depreciation account (to increase the contra-asset).

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

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

  1. Debit balance.

  2. Credit balance.

  3. Nil balance.

  4. (A) or (B).
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Accumulated depreciation is a contra-asset account. Since asset accounts have debit balances, their contra-accounts have credit balances.

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

Accumulated Depreciation account has a _____________.

  1. credit balance only

  2. debit balance only

  3. credit or debit balance

  4. all of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
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.
Multiple choice book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

An alternative term used for accumulated depreciation expenses?

  1. Provision for depreciation.

  2. Cumulative depreciation.

  3. Targeted depreciation.

  4. Depletion.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Provision for depreciation is a common term used to describe the accumulated depreciation account in many accounting frameworks.

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

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

  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
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

When an asset is revalued, the new depreciation charge is based on the revalued amount and the estimated remaining useful life of the asset.

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

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?

  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. $\begin{matrix} Machinery\quad A/c & Dr.\quad 14,434 \ Accidental\quad Loss\quad A/c & Dr.\quad 6,566 \ To\quad Machinery\quad A/c & \quad \quad \quad \quad \quad \quad \quad \quad \quad 21.000 \end{matrix}$
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The machine cost 21,000. Depreciation for 2013-14 (11 months) = 21,000 * 0.15 * 11/12 = 2,887.5. WDV = 18,112.5. Depreciation for 2014-15 = 18,112.5 * 0.15 = 2,716.875. WDV = 15,395.6. Depreciation for 2015-16 (5 months) = 15,395.6 * 0.15 * 5/12 = 962.2. Loss = 15,395.6 - 962.2 = 14,433.4. Option C matches these figures.

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

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

  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
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

When using the provision method, depreciation is recorded by debiting the Profit and Loss account (as an expense) and crediting the Provision for Depreciation account.